Resilience : The Buzzword

The Financial landscape is throbbing with pulsating changes and is in the cusp of a paradigm Shift. The acronym that rules this unpredictability may be coined as VUCA.

What is VUCA?

• Volatility :  The state of Flux is the rule of the game 
• Uncertainty : There may be more as Change is Permanent
• Complexity : As you breakdown from complex compounds to granular solution, the process is not simple to build the Chain upstream
• Ambiguity: When analysis is grappling with changes and looks beyond, for a new normal.

It is with this backdrop, that concept of Resilience is the Key Focus.

The resilience is for not only the individual financial institution but also resilience amongst the interdependence of the institutions, which in turn engulfs the complete ecosystem.

It is thus important that the Financial Institutions, which has evolved through several realms of Risk Management, is now making pivotal changes to embrace Systemic Resilience as its cornerstone.

Drawing attention to the  (Inaugural Address by Shri Shaktikanta Das, Governor Reserve Bank of India – April 27, 2023 – Delivered at the Global Conference on Financial Resilience organised by the College of Supervisors in Mumbai

The synopsis of the speech focused on a future – ready Bank needs to be organizationally, financially and operationally resilient.

• To be Organizationally resilient, it is important that the organizations are equipped with ability to predict risks and should be proactive enough to make the strategic changes so that any adverse incidents impacting balance sheet can get absorbed.
• To achieve organization resilience, the financial institutions need to focus on continuous enhancement of its policies, standardization of processes and strengthening of good governance practices
• To be operationally resilient, it is important that the Banks should have strategies and processes in place to ensure that even in the face of disruption, the critical services are given to its customers. It is thus important that the services are tested periodically to ensure smooth operations even in the face of threats and risks. The threats today may range from natural calamity to possible cyber attacks, thereby may cripple the services.
• To be Financially resilient, the Bank should have adequate capital buffers and should be able to generate earnings in the face of macroeconomic shocks. Liquidity should be adequate to ensure that the obligations are met will within timeline at various adverse situations. In order to achieve this, the Bank’s business models and strategies to be critically examined and changes incorporated accordingly. Additionally, it is to note that Resilience is a Collective effort and cannot be left in the hands of the regulators alone. This requires contribution from all stakeholders and market discipline.

Key Takeaways :

• The Banks need to measure resilience and start to report it internally.
• Review resilience dimensions regularly and systematically, identifying strengths and weaknesses compared with industry peers.
• Conscious investments to build first line capabilities in resilience
• Integration of personal resilience with intra departmental resilience for better integration in any transformation journey

 The 3As model of resilience, though originally conceptualised in the context of climate change and disaster management, provides a useful template. The 3As of resilience are:

Anticipatory Capacity : It could be thought of as the ability of the financial system and its constituents to identify and measure emerging risks as early as possible and mitigate the risks by taking corrective actions.

Absorptive Capacity is the ability to withstand the losses which may arise due to shocks and cannot be mitigated or avoided.

Adaptive Capacity helps in adjusting to the new realities, be it changed regulatory/economic conditions or a new competitive landscape.