title: IMPACT OF COVID-19 AND RELATED GOVERNMENT INTERVENTION ON CREDIT RISK MODELLING, MEASUREMENT AND REPORTING IN BANKING
Creators: name: Mitra, Joydeep
Publisher: name: University of Liverpool Repository
Year: 2024

description: Amidst the global crisis of COVID-19, governments worldwide have taken extensive measures to safeguard the health sector, economy, jobs, and overall wellbeing of citizens. This study dives into the repercussions of these interventions on credit modelling within the banking sector, with a specific focus on the Australian context.

By analysing historical macroeconomic data, it becomes apparent that the stable relationships typically observed between some macroeconomic measures were disrupted in the years 2020 and 2021 by the extensive government intervention. This disruption is exemplified by the divergence between the predicted and actual credit default rates during this period. A method to adjust for this disruption is proposed, although its application is challenging due to its dependence on the accurate forecasting of future macroeconomic conditions. As a result, input macroeconomic factors for credit models have been tainted during the COVID-19 pandemic.

Furthermore, the Australian government introduced a policy during the pandemic to enable retail and small business customers to defer loan repayments, described as 'repayment deferrals' or 'payment pauses'. As part of this intervention, banks were granted concessions allowing them to overlook arrears from customers making use of these facilities when determining default status. This policy, though well-intended, corrupts default rates, which are the output of credit models, as customers could have avoided defaulting simply by requesting a deferral to their payments. 

In the spirit of action research methodology, the study also reflects on the application of theoretical findings in practice. The thesis uncovers insights about the nature of challenging problems, the constraints encountered in solving them during crises with limited resources, and the implications of these issues on learning and growth. The study also posits that there might be inadequate incentives for practitioners to find comprehensive solutions to these complex problems.

This research holds a unique position in the larger discourse on the impacts of COVID-19, as it ventures into the often-underexplored area of the financial sector. Traditionally, research has concentrated on how the pandemic has affected the "real" economy and society. Drawing lessons from past events like the global financial crisis, this study highlights the significance of impacts on the financial sector that may initially seem less apparent but could eventually have profound consequences on the "real" economy and society.

The study concludes that while government interventions during the pandemic have successfully prevented widespread financial hardship, they have also created lasting distortions in macroeconomic measures and retail default rates. These distortions, which are critical inputs and outputs in credit modelling, are challenging and sensitive to correct, leading to the unsatisfactory solution of excluding data gathered during the pandemic. A more targeted approach from policymakers in assisting customers may have prevented this data distortion.

Future research should aim to reach a consensus on the appropriate adjustments to macroeconomic measures that accurately reflect the economy's actual state. Additionally, from a management perspective, there should be an emphasis on identifying strategies that incentivise the discovery of more effective solutions to complex problems.