COVID Vulnerability Rating (CVR) Framework
Given the unprecedented scale and dynamics of this crisis, trying to assess credit risk based on previous risk ratings doesn’t make sense as all previous correlations are broken. Lenders recognise that there is a need to re-underwrite their loan books with a forward look view. However the forward look scenarios will need to be adjusted on a regular basis given the changing nature of the current environment.
OakNorth has developed a “COVID Vulnerability Rating” (CVR) Framework, which integrates over 130 proprietary subsector-specific COVID-19 stress scenarios with regional overlays, incorporating assumptions for impacts on key financial metrics such as revenue, operating costs, working capital and capex. The Framework enables commercial lenders to re-underwrite loans and bring consistency to their credit approach through the crisis, running risk analysis on a consistent basis.
Based on the framework, the OakNorth Platform helps lenders undertake portfolio diagnostics to rate loans from 1-5 based on their vulnerability to the new economic environment, with 1 being least vulnerable, and 5 being most vulnerable. The ratings are based on multiple factors including liquidity, debt capacity, funding gap & profitability, and can be dynamically customized to reflect the lender’s credit risk criteria and appetite.
The Framework enables commercial lenders to re-underwrite loans and bring consistency to their credit approach through the crisis, running risk analysis on a consistent basis, as well as monitoring all credits more closely - given that sectors have become more volatile post-COVID-19.
Factors forward looking scenarios
Easy Onboarding: Requires only 15-20 data points on each borrower that can be easily extracted from banks’ spreading and core banking systems
Enriched through external third-party data
Constantly refreshed: Platform regularly updates its COVID stress scenarios to reflect the updated views on the macros and sector specific developments
Frequent reviews: Diagnostics can be done for 1000s of borrowers within 24-48 hours, allowing banks to frequently review their portfolio to factor the evolving COVID impact across sectors
1-click Deep Dive: For any cases added to the Platform for segmentation banks can request additional analysis to help determine the more granular risks (or opportunities) for a particular borrower