As COVID-19’s international spread has accelerated, markets have started to price in epidemic-related risks. This paper provides a four-step approach that can enable executives to quantify impacts and define mitigating actions, helping them tackle near-term (crisis management) and long-term (structural liquidity management).

1. White Paper
COVID-19: Sustaining Liquidity/Funding
Management and Treasury Operations in All
Scenarios
Matteo Coppola, Lorenzo Fantini, Michele Rigoni, Pascal Vogt
March 2020

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BOSTON CONSULTING GROUP March 2020
hile the COVID-19 outbreak appears to be plateauing in Greater China, it has
reached an inflection point elsewhere, characterized by the emergence of
multiple epicenters. More than 140 countries have been affected, compared
with around 20 in mid-February, and infection rates in many are rising fast.
As COVID-19’s international spread has accelerated, markets have started to price in
epidemic-related risks. Equity markets have posted some of the biggest daily declines
since the 2007 financial crisis. Based on the experience of previous outbreaks (MERS in
2014, 2015, and 2016 or the Spanish flu in 1919 and 1920), the virus is likely to strike in
several waves, suggesting that containment measures will be only partially effective until
the release of a vaccine, which is currently not expected before Q1 2021. In this context,
the crisis could last for another year and the risk of recession is real, although it is too
early to call given financial market volatility is mostly being driven by uncertainty.
Several central banks have taken action to shore up the financial system and offset an
economic slowdown. The European Central Bank (ECB) on March 12 announced a
number of measures to ensure that its directly supervised banks can continue to fulfil
their role in funding the real economy. In particular:
 Banks can make full use of their liquidity buffers. The European
banking sector has built up significant liquidity reserves. The ECB will
allow banks to operate temporarily below the minimum level of the
liquidity coverage ratio (LCR).
 Banks can get relief on Pillar 2 capital requirements. They can make
use of hybrid capital instruments that do not qualify as Common Equity
Tier 1 (CET1) capital, for example Additional Tier 1 or Tier 2 instruments,
to meet Pillar 2 requirements set to come into effect from January 2021.
Based on historical evidence, a V-shaped scenario – in which a GDP hit is followed by a
rebound, with no long-term loss of output – is most likely. However, more pessimistic
scenarios remain possible – especially in today’s interconnected world – and even a
relatively speedy rebound may have long-lasting impacts on consumer behaviors, value
chains, politics, and organizations.
To safeguard stability and respond appropriately, CFOs, treasurers and CROs need a clear
understanding of how liquidity/funding management and the treasury operating model
may be impacted. A four-step approach can enable executives to quantify impacts and
define mitigating actions, helping them tackle near-term (crisis management) and long-
term (structural liquidity management) challenges. (See Exhibit 1).
W

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BOSTON CONSULTING GROUP March 2020
Exhibit 1: Four key steps in a scenario-based approach
 Step 1 – Vulnerability analysis. Assess the short-term vulnerability of the
operating model and the bank’s liquidity and funding position.
 Step 2 – Scenario design. Design scenarios to assess the medium- to long-term
impact on both operating model (e.g. increasing employee absence) and liquidity
and funding positions (e.g. substantial closure of short-term repo markets)
 Step 3 – Impact assessment. Derive the impact on (i) business activity/volumes,
(ii) treasury operating model and (iii) liquidity /funding financial impacts.
 Step 4 – Trigger-based structural actions. Prepare decisive trigger-based
mitigation actions (e.g. change governance/reporting lines for capital markets
swap desks).
Step 1 – Vulnerability Analysis
Banks should consider two dimensions when assessing the vulnerability of treasury
activities:
 COVID-19 risk – driven for example by remote vs. on-premise working, presence
of backup facilities, need for concentration of FTEs in physical spaces, time-
criticality.
…
…
…
1. Vulnerability analysis 2. Scenario Design 3. Impact assessment
4. Trigger-based
structural actions
4 steps for a structural scenario-based action planning
Business impact
Operating model impact
Liquidity & funding impact
Scenario A
Scenario B
Scenario …
KPIA1 KPIA…
KPIB1 KPIB...
KPI… KPI…
Clients draw committed
credit lines
…Small team for Treasury
hedge execution
Increasing funding
spreads
BusinessOperationFinancial
…
…Safeguard retail deposit
volumes
…
…Change governance for
CM swap desk
Free-up additional
collateral
Opportunities

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BOSTON CONSULTING GROUP March 2020
 Necessity of any activity in crisis mode – driven for example by the regulator’s
expectations for continuity.
The treasury function faces a range of specific vulnerabilities emanating from the COVID-
19 crisis. (See Exhibit 2). For example, remote working is often difficult for a trading desk
– remote access is usually limited to few employees. Additional fragmentation (beyond
emergency trading rooms on-site) usually introduces inefficiencies and can hinder the
bank’s ability to execute trades under internal compliance policies.
Exhibit 2: Structural assessment of treasury vulnerability
Project work should be carefully prioritized. It may be that some projects can be
descoped or even postponed. A rigorous assessment should take into consideration, i) the
level of commitment and obligations to regulators and internal stakeholders (board,
senior management, internal audit), and ii) the level of risk exposure generated by the
project (e.g. financial, reputational).
For monitoring and reporting activities, a more differentiated approach is required.
Some activities can be deprioritized if resources are scarce (e.g. detailed analysis of new
asset volumes). Others are critical, including monitoring of liquidity and funding positions
(including buffer volumes, open credit lines, impact on money market and repo
operations, short-term issuance programs, and potential deposit outflows). For many, this
will be familiar from the last financial crisis.
Treasury activity analysis
High
Low
HighLow
Covid 19
risk
of activity
Necessity
of activity in
crisis mode
1 Money Market / Repo
Execution functions
2 Liquid asset buffer
3 Equity issuance
4 Funding issuance
5 Investment portfolio
6 Swap execution
1 Liquidity Management
Steering tasks
2 Funds-Transfer-Pricing
3 Analytics / modeling
4 Hedge-Accounting
5 Stress testing
6 Recovery planning
7 Investor relations
8 IT related project work
12
3
4
5 6
12 3
4
5
6
7
8
9 Other project work
10 Reporting
10
9
10
Focus on
crisis relevant
reporting

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BOSTON CONSULTING GROUP March 2020
Step 2 – Scenario Design
While tactical short-term measures can partially restore day-to-day activities, they should
be seen as the first step in a concerted effort. To build resilience, organizations should
swiftly move to a scenario-based approach. Scenario design should start with the
identification of two/three macro scenarios relating to the spread of the contagion. As in
any scenario-building exercise, there should be two macro types:
 A general health-related scenario, often used by researchers and medical experts
to describe the spread of diseases based on aggregate statistics (e.g. number of
infected people, contagion curve impacting treasury staff in key activities).
 An event-based scenario, which is idiosyncratic and relates to specific triggering
events (e.g. quarantine of a specific area, expected drop in volumes).
We recommend starting with a limited number of these high-level scenarios and then
translating them into treasury-specific sub-scenarios, based on a narrative that
comprehensively captures the key vulnerabilities identified in the previous step. A few
simplified examples:
1. Pressure on the liquidity buffer:
o Potentially lower inflows (from LCR point of view) from suspended
mortgage payments (e.g. Italy), deterioration of credit portfolio and defaults
on loans, lower volume of secured lending transactions due to scarcity of
underlying securities.
o Potentially higher outflows (from LCR point of view) due to evolution of
contingent liabilities (higher drawing of committed credit lines), deposit
withdrawals (in particular for lower-rated, lower-capitalized banks), higher
margin calls on derivatives, less secured funding backed by level 1 assets,
due to market scarcity – more with level 2 and below, leading to higher
haircuts.
2. Funding spreads increase and funding markets shut down:
o Interbank and repo markets dry-up; good quality collateral gets scarce,
even with central bank intervention (muted impact of Fed interventions in
the repo market).
o Senior unsecured and hybrid capital instruments: new issuance levels
drop; refinancing spreads increase drastically.

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BOSTON CONSULTING GROUP March 2020
o Covered bond collateral exhausted, not enough supply of new mortgages.
Virtually any financial risk (and some non-financial risks) can turn into liquidity risk. The
most critical of these should be accounted for in scenario modeling. These might include
credit risk reducing cash inflows, counterparty risk exponentially increasing liquidity risk,
and interest rate volatility undermining the liquidity of a bank’s investment portfolio due
to increasing haircuts.
It is important that each scenario is assigned a qualitative likelihood (e.g. high, medium,
or low) and, more importantly, a set of leading KPIs (e.g. size of liquidity buffer available
for the next N working days) – and thresholds - that can highlight potential changes in the
likelihood of each scenario. Monitoring of KPIs against a set of predefined thresholds will
provide early warning signals relating to which scenarios are more likely and guide
remediation strategies (see below). They should be closely and regularly monitored and
reported to senior management, the board and risk/audit committees, which should
ensure adequate oversight of the process.
Step 3 – Impact Assessment
The next step is to identify the potential economic impact of each scenario. To simplify
and structure this step, it makes sense to group impacts in the same categories as used in
the vulnerability analysis:
 Business activity/volumes: The level of potential decline in sales or trading
volumes will depend on the level of disruption (e.g. to revenues, earnings) due to
loss of business volumes/customers and/or lower levels of transactions. It can be
measured through quantitative (e.g. deterministic or stochastic simulation/stress
testing) or qualitative metrics (such as loss of reputation). Once the business impact
has been estimated, the CFO, treasurer and CRO should jointly assess the impact
on liquidity/funding management.
 Treasury operating model. This will depend on the number and relevance of the
impacted functions. We recommend banks structure the impact assessment in line
with i) necessity of treasury activities in crisis mode, and ii) risks posed by the
COVID-19 epidemic. Clearly, a scenario affecting several critical functions will
have a more severe impact.
 Liquidity/funding financial impact. Potential impacts include a structural liquidity
shortage or structurally increased funding costs, leading to lower profits or losses.
We recommend treasurers define and calculate a few KPIs (e.g. liquidity cushion

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BOSTON CONSULTING GROUP March 2020
after N days, funding need in the next N months; regulatory metrics like LCR and
NSFR would play a second order role) to summarize the severity of each scenario,
combining all impacts above and allowing reviewers to compare scenarios and
their impacts over time. A reporting dashboard is a powerful tool that can help
managers gauge required actions and their urgency.
Step 4 – Trigger-based Structural Actions
The ECB regards the treasury function as “critical”, which means it is required by law to
continue operating. This fact alone highlights the need to respond to any significant
impact derived from crisis scenarios.
As in a traditional risk appetite framework, contingency actions should be activated when
there is a breach of early warning levels for identified triggers. Mitigating solutions should
be defined consistent with the categories described in the previous sections. They should
be more or less aggressive depending on the likelihood and severity of the scenario and
should comprehensively cover:
 Operating model stability actions. These may include:
o Diversification (including on a geographical basis and within buildings) of
key treasury activities – potentially working across time zones and backups
for critical activities (even multiple ones).
o Limitations and tracking of contact among employees responsible for
critical functions - when required to work on premise.
o Provision of protective or smart working equipment, part-time working
options, reliable remote connection options, Still, some treasury activities
will not be suited to smart working (e.g. market access) and companies need
to plan ahead.
o Change in governance, for example bringing money market and repo desks
fully under treasury control (if they are not already).
o New IT infrastructure will be required if 50%-60% of people work remotely.
 Liquidity and funding stability actions. These may include:
o A switch to “amber code” liquidity management, with more frequent
evaluation of liquidity buffers and treasury portfolios, and related reporting
to senior management.
o The activation of ad-hoc contingency measures, evaluating the trade-off
between liquidity and profitability – for example, increase liquid asset
buffers for as long as possible to cover all scenarios analyzed in steps 2 and
3.

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BOSTON CONSULTING GROUP March 2020
The more rigorous the approach to the four scenario-planning steps, the more resilient
the treasury organization will be. Senior management should plan carefully, so that
effective remediation steps can be put in place quickly once a scenario (or a variant of it)
materializes.
Finally, while it is paramount in a crisis to manage uncertainty, there may also be an
opportunity to add value:
 In an adverse scenario, a more liquid bank (not necessarily better capitalized) can
pick-up less liquid assets at discounted prices. Weaker banks may be forced to shed
Level 2 and below assets for cash.
 There is a potential benefit for banks that are perceived as “stronger” in the long-
run – they will likely see a deposit influx, as seen during the last financial crisis.
Conclusion
In light of the spread of COVID-19, bank treasurers (along with CFOs and CROs) must
refocus on maintaining operating model stability and safeguarding the bank’s liquidity
and funding position. Equally, it is vital that they communicate clearly, both internally
(providing assurance and helping to shape culture and behaviors) and externally
(reassuring stakeholders that the company understands its potential vulnerabilities and
has structural solutions to address them). A lack of communication will cause stakeholders
to assume the worst (significant impact and no contingency actions).
In the midst of a period of uncertainty, there is little value in hesitancy. Leaders must
proactively manage their response and work with determination toward the best possible
outcome.
Matteo Coppola
Lorenzo Fantini
Michele Rigoni
Pascal Vogt
Matteo Coppola is a senior partner and managing director in the Milan office of Boston
Consulting Group. Lorenzo Fantini is a partner and managing director in the firm’s Milan
office. Michele Rigoni is a principal in the firm’s Milan office and Pascal Vogt is a partner
and director in the firm’s Cologne office.
You may contact the authors by e-mail at:

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BOSTON CONSULTING GROUP March 2020
coppola.matteo@bcg.com
fantini.lorenzo@bcg.com
rigoni.michele@bcg.com
vogt.pascal@bcg.com
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