As a responsible risk Valiant, I live each day with the challenge of managing uncertainty in an environment VUCA: volatile, uncertain, complex and ambiguous. This reality, far from being a fad, it defines the context in which we operate and requires us to adjust our strategies constantly in order to maintain the resilience and competitiveness.
In the wake of the recent note of Bloomberg —which leaves no room for doubt about the pressure of living of the producers and the banking system, brazilian— I got to thinking about what are the real challenges that face those who manage risk in environments as unstable. In this article, I invite you to reflect on a context that is not far away, and that forces us to rethink the way in as acting in situations of vulnerability and that I will develop later.
The perfect Storm: rates, crop yields and accounting
I put them in context:The Banco do Brasil is funding half of the agro-industrial sector and this segment represents a third of their total loan portfolio. Already we see it coming, clearly it is a massive exposure. It is a figure which far exceeds its competitors. And when a giant like the agro —brazilian responsible for a significant portion of global exports of orange juice, sugar, coffee, soybean, and corn— it starts to wobble, the impact is not the only sector; it is a blast that can affect the whole economy and the available credit in general.
2024 is characterized as a year’s particularly hard for the producers brazilians. The combination of interest rates at record highs with setbacks in crops created a perfect storm. But added to this is a measure of the Central Bank of that country, which, while it is necessary for transparency, impact-full in banking: the obligation of applying it in the time expected losses and stop accounting for the interest in arrears on loans. This decision, although it seeks to strengthen the robustness bank, puts enormous pressure on entities such as the Bank of Brazil, who were accustomed to an accounting more flexible.
What really concerned about is the scale of these bankruptcies. Since we do not speak of settings cyclic usual in the agricultural sector. We are facing the real possibility that these difficulties can be transformed quickly into a systemic problem for the banking stability. And there is where comes our challenge: how do we measure risk in environments as dynamic and volatile?
Goodbye Static Analysis: The Need for Dynamic
The answer is clear: the risk analysis may not be static. We can not rely solely on the credit history, as if the past were a guarantee of the future in a world that is changing at breakneck speed. That is like driving by looking only in the rearview mirror.
Today, the key is the dynamic. We need an approach that puts the focus on the real-life context, in the variables macro-and micro-economic constantly moving, and, fundamentally, in the speed of reaction to changes. This implies:
- Real-Time monitoring: Let go of the quarterly or annual reports as the only source of truth. We need tools and processes that allow us to have a vision almost snapshot of the health of our debtors, and the sectors in which they operate.
- Predictive analytics Advanced: Going beyond traditional models. Implement artificial intelligence and machine learning to anticipate possible risk scenarios, not only to react to them. This means considering not just the financial variables, but also climatic, political, regulatory, and geopolitical.
- Adaptation strategies Quick: Our wallets and our credit policies should be flexible enough to adapt quickly to changing conditions. This could involve renegotiations proactive, portfolio diversification, or even the timely delivery of high-risk exposures.
- Stress testing Continuous: Not only those required by regulators. We must make our own stress tests, simulating scenarios are extreme and unlikely, to understand the resilience of our operations and where are our weak points.
The Challenge is All
This is not only a challenge for the agro-industrial sector or for banks exposed to him. It is a call of attention to the entire financial system and for any economic actor is dependent on the stability in volatile environments. The fundamental question that we must ask ourselves is: how prepared we are to absorb shocks sector of this magnitude?
At Valiant, we believe that resilience is built on the anticipation and adaptability. We can’t control the elements, but we can dramatically improve our ability to navigate in the storm. It’s time to stop measuring risk looking back and start to build a future where risk management is as dynamic as the world in which we operate.
The risk, in these times, is best measured when you think about it amongst all.
