Banking Through Corona Times: Business in Pandemic

As the coronavirus lock down spreads around the world and leading the major economies of the world to the brink of a major recession, it is natural for us to consider historical look back as a means of guidance. The US Economy is expected to shrink now by a quarter, which is as big of a cut as the Great Depression.

Yet, what is different this time is the nature of the cause of the depression and of course the shock wave that spreads to a few weeks, different from a regular recession that lasts longer due to a stretched out impact.  Let us leave for now the discussion of how long it will take the global economy to recover to the economists that have vast data and historical analogies.  No matter how many months or years the recovery will take, we all should also focus right now on how a long term restructuring of all financial institutions (FIs) could assist the recovery.   It is now indisputable that the post covid thinking will be radically distinctive compared to before, not only for governments and public institutions but also for private sector and FIs.  The first part of our discussion here focuses on how banking will be operated through the pandemic.  In the second part we will focus on banking and post-covid recovery and the role of FIs.

The global economy is facing a triple shock.  On the demand side, business completely evaporated for hotels and airlienes and on the supply side the manufacturing has completely stopped in electronics, automotive and textiles.  Lack of confidence in the markets cause tensions on stock markets, treasuries and repo.   Financial markets are globally facing a state of high volatility.  In that sense, FIs, are required to strategize how they could improve their level of resilience and get prepared for further macro-economic shock.

  1. First part of the resilience is “operational resilience” and business continuity as the lock downs and stay home warnings naturally cover the bank workers and traders working from home as much as the IT systems of their banks and FIs should allow. However, work from home is not only constrained by the technological capacity but also by laws and regulations and how much they allow official personnel to trade out of bank systems.  Yet, the banks should also act as responsible citizens and facilitate the business environment for their employees to work from home.

  2. The second element of banking through pandemic is how the banks should respond to clients who are under stress and act thoughtfully. Providing proper advice on wealth management becomes particularly crucial. The global sector so far witnessed principal moratorium on property loans or extending the maturity period for trade loans. Of course support from asset management and loan syndicates is well expected to widen such relief mechanisms.

  3. It is natural that some market participants already experience liquidity tightening. Contingency funding plans have been possibly activated and strong swings in stress testing results will soon be part of financial reporting.  What further steps should be taken and how liquidity short falls will be covered in short term need to be discussed.  The relationship between the banks and the regulators are particularly sensitive in discussing liquidity coverage ratios and revising status requirements for the benefit of business recovery and support of the private sector.

  4. The banks are now facing a challenge to sustain business in pandemic yet it is also possible such crisis will force the banks to reinvent models and prepare for new opportunities. Banks should now look beyond crisis and prepare for new business opportunities during and post pandemic.

  5. Governments will naturally lead the strategy to assist the private and public sector suffering, as they did in 2008 financial crisis. While engaging in active dialogue with public stakeholders, supervisors and governments, FIs should work with government-backed programs to lend funds to investors.

  6. Communications is imperative because sharing information with stakeholders including employees, customers, business partners, vendors, investors, regulators and offices overseas means the joint development of instruments to continue business in pandemic. It also serves the transparency and accountability.

Winston Churchill once said “Never let a good crisis go to waste”.  It is true that we are in the middle of a centennial crisis.   All institutions and citizens will hopefully emerge through this shock with a reformed perspective of their roles and responsibilities.  Banks and FIs could be part of the solution by only becoming the leaders of that reform.  If not, they would only be remarked as the source of problems in post-covid thinking.

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