Enhanced Stress Scenario Technique in a Covid-19 World
By Craig Spielmann and Stephen Woitsky
CFPPRO July,2020
The Covid-19 virus will continue to be the main focus of many organizations for the next few of years. Yes, folks until a proven vaccine is developed and made available, we are going to be stuck wearing face masks, sanitizing our hands 100 times per day and maintaining social distancing practices. However, the world does continue to turn, even though we can’t go out and enjoy it.
At RiskTao, LLc we recommend utilizing our Multiple Event Simultaneous Scenario (MESS) approach. This methodology enhances the standard scenario analysis methodology. The MESS approach is based on the theory that major events can occur simultaneously, and their occurrence should be assessed that way. We have already seen organizations battle with Covid-19 and tornados in the Midwest, powerful earthquakes off the coast of Japan and LA, and severe storms in Florida and the North East. California will shortly be entering the summer fire season and meteorologists are predicting a very active 2020 Atlantic hurricane season due to increased water temperatures.
The MESS approach combines two or more of these events into one scenario exercise because the impacts could be interrelated and have a profound effect on remediation efforts.To implement MESS, risk managers should select two (2) – four (4) major events occurring at the same time. Their goal should be to identify the challenges and interrelationships of these events on the organization’s strategy, technology, operations and plans . It will give clarity to potential weak points and position the organization to manage through extreme stress. We recommend that risk managers pick major events that have an existing history and have a good chance of occurring. For example, in California, I would recommend a MESS scenario that includes Covid-19, a massive fire and a significant earthquake. On the east coast of the US, I would recommend looking at Covid-19, hurricanes and a cyber-attack.
Stephen Woitsky, Group Risk Manager from Bank of the West , “MESS training provides management with important practices to expand their thinking and decisioning capabilities. They need this capability to address the natural or manmade risk in a suitable way. This can be the difference between success or failure.”In addition, we recommend using the full spectrum of ERM risks. Stephen’s view is “that scenarios need to use all major risk types such as credit, market, liquidity, strategic and operational risks to truly assess the MESS impact to their franchises.“ It is our belief that all risk assessment should use this approach and not limit themselves to one risk discipline.
Today, many assessments cover operational or compliance risks. We believe businesses should be assessed by how they manage all their risks.We ran the first major MESS exercise at CFP’s 2018 Risk Americas Conference. We had about 50 people and broke them into 5 separate groups. The simultaneous events were a “hot war with North Korea and a level 5 Hurricane hitting the DC to Boston corridor which is home to critical financial, communication, medical and government infrastructure as well as 45 Million people.”
We used data from NASA and several other government agencies as well as historical data to provide the groups with real life information. Hurricane Sandy was a classified as a category 1 / tropical storm when it hit the NY/NJ area and it destroyed many homes, businesses and infrastructure. Specifically, the MESS was that the Hurricane was expected to cause massive flooding in low-lying areas that include NYC, Boston, Jersey, Delaware, Maryland and Virginia shorelines. It was expected to cause extensive power outages, flooding, extensive damage to transit, severe beach erosion, damage to homes and business structures as well as bridges and tunnels. Banks and the stock exchanges enacted their contingency plans at remote locations. Simultaneously, tensions with North Korea reached a boiling point.
There were reports that North Korea will begin an all-out attack on Seoul. US troops were put on high alert and were considering a pre-emptive strike. China has warned the US to “stand down” and their military position was unknown. Global markets were in a “free fall” and exchanges were going into emergency shutdown. Companies and individuals were panicking and drawing down on their credit lines. Bank capital was quickly eroding as the price of their equity diminished. Liquidity dried up, as there were few buyers for stocks given the following: Massive real estate related exposures, business loans and consumer credit cards and loans.
Some commercial property mortgages were literally “under water” and probably unrecoverable. Unemployment was expected to reach 20 percent. Trade and commence with China and other nations was frozen due to the Korea hostilities. New treasury issues struggled to sell as China, Russia and other nations were no longer interested in funding the US government. Only 1 group out of 5 believed they could survive this MESS but would require massive government bailouts and capital requirement relaxation. The other groups believed they would go under. That was the beauty of the MESS exercise. It brought people to the brink and gave them a realistic look at what was over the edge if they didn’t thoroughly prepare.
Several strategic steps came out of the exercise such as exploring follow the sun operations, coast to coast contingency and recovery, operational resiliency reviews, senior management succession plans, delegation authority and loan portfolio diversification. Some of these are standard practices at many firms but the group was concerned that the ongoing monitoring and governance processes may be based on best case scenarios and not a MESS event.In conclusion, a MESS exercise is emotionally challenging and requires management commitment. However, there is no substitute for preparation and thorough planning. It takes intestinal fortitude to map out plans in light of these major events but that is the key to survival. The ability to face and prepare for potential major events occurring simultaneously will separate the survivors from the rest. It’s up to you to make the right choice.
