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The ongoing spread of COVID-19 carries with it one of the biggest threats to disrupt the global economy and financial markets. In this article, we are talking about banking in the times of coronavirus. We cover what are bank’s Do’s and Don’ts in these unprecedented times.
Lockdown has led to a decrease in productivity. It has already taken a toll on the financials of the corporate sector. The disruption in the supply chain, manufacturing hindrances, and crippled healthcare systems demand huge stimulus from the government for running operations smoothly.
The announcement of lockdowns and shutdown of major countries in the wake of the coronavirus pandemic has lead banks to face significant defaults in payments and struggle with liquidity. Moreover, it has also become apparent that banks and financial institutions all over the world will find it difficult to sustain their record earnings of previous years. Investor sentiments are at an all-time low and bank shares have been seeing a sharp decline showing the dip in confidence in the global financial system.
The Big Economic Picture
The Organisation for Economic Co-operation and Development (OECD) has downgraded its 2020 growth forecast. It also stated that the economic situation was stabilizing until before the hit of COVID-19.
Lockdown across the world has led to a recession, rendering loan repayments by small businesses and customers a virtual impossibility. This is especially applicable to the sub-prime segment. Central banks across the globe have taken various measures to stabilize the financial market, as well as the economic activity around the world. Interest rate cuts and bond-buying has been uniformly adopted by all the central banks to inject liquidity in the economy.
Many leading banks of the world have relaxed rules for the banking sector to help the industry.
What are US Banks doing these days?
- WaFd bank (previously known as Washington Federal Bank) is offering credit up to $200 000 to small businesses, which is interest-free for 90 days.
- Citigroup has forgone monthly service fees and penalties for small business and retail customers wanting to withdraw their fixed deposits. The bank has also raised the credit limits for some credit card customers.
- New York-based Ridgewood Savings Bank has offered interest-free loans to its customers on the basis of their deposit balances. It is also exploring forbearance on interest payments for borrowers.
The Payroll Protection Program is obviously the biggest stimulus for small banks but ran out of money on April 16. On Friday, April 24, President signed into law a new bill providing additional $310 billion into the Paycheck Protection Program (PPP), created under the CARES Act (Coronavirus Aid, Relief and Economic Security Act) to help small businesses keep employees on the payroll, and Economic Injury Disaster Loans (EIDL). Round two of the Paycheck Protection Program opened Monday morning, April 27th, at 10:30 am ET. $320 billion that has been allocated to the PPP. In the second round, $60 billion is to be allocated for smaller lending institutions. Yet, the Small Business Administration’s systems have already been experiencing some issues due to the flood of backlogged applications. Money is expected to run out even faster than in the first round. It is also very likely that even the second round of PPP funding will not be enough to help small businesses out there.
What are European Banks doing in the coronavirus times?
- Many leading banks in Europe have shut down their branches. Germany’s largest bank, Deutsche, has closed its 1,000 branches.
- Italy’s biggest retail bank, Intesa Sanpaolo has closed its 900 branches and many of its other branches are open only in the mornings. However, the banks have ensured that digital and online banking is running smoothly.
- One of Britain’s biggest domestic lender Lloyds has also waived off fees on delayed payments on credit cards and loans.
What are Canadian Banks doing?
- Most of the Canadian banks and financial institutions have reduced their prime lending rates by 50 basis points.
On the brighter side, governments across the globe have taken prompt actions in relation to the coronavirus outbreak. There is a high level of awareness of the virus and methods to prevent its spread.
The ongoing market volatility has led many people across the world worrying and scrambling to find safe havens for their money and questioning whether their country’s financial system is secure enough. In such a situation below are some points to consider before making any financial decisions.
What To Do
Do: Increase Liquidity
To protect the economy from the damage caused by the outbreak of COVID-19 central banks of many countries have cut short term interest rates and are on standby to provide any urgent liquidity support. The bank needs to ensure that it has ample liquidity to support the operations and needs of its existing clientele. Failure to support during such a crisis can lead to confidence erosion amongst customers.
Do: Trim Spending
As the economy is changing rapidly and is heading towards a recession, trimming discretionary spending can prove to be fruitful for getting through the tough times. Work bonuses raise, and promotions, marketing, and promotions are all segments that can be considered to trim budgets.
Do: Seek Strategic Partnerships
This is a good time to go to the drawing board and assess your strengths, weaknesses, opportunities, and threats. Look out for areas where you can partner to grow your business for the long term. Technology partnerships are one of the biggest areas to seek a partner, including technology for lending automation.
Do: Hold off on Major Purchases
While things are so uncertain, big capital expenditures should be postponed if at all possible. The new head office or expansion to Europe can wait.
Do: Go Digital
COVID-19 seems to be the final nail on the future of branch banking. Digital banking is the only way forward and investing in having a 360-degree digital product is not an investment for the future but critical for survival today.
Do: Invest in Short-Term Goals
Tough times are also an opportunity to take advantage of the situation. Your competing regional bank might be in a state of panic or in a liquidity mismatch. This makes it vulnerable and can be a great time to capture further market share. Take the low hanging fruit and convert it into a win.
What Not To Do
Financial anxiety and panic may drive an urge to sell your loan portfolio for immediate liquidity. Warren Buffett will attest that unless absolutely critical, the crisis is not the right time to be selling. According to financial experts, financial sectors of the economy will recover as soon as the outbreak clears. Thus, it is better to evaluate the investment goals and then make a sound investment decision.
Don’t Consider it to be Work as Usual
Coronavirus will change how we fundamentally conduct our businesses. This will be true for lending and banking as well. Putting employee and client safety first will be of paramount importance. Failure to show empathy can lead to major reputational damage. Profit and community need to be both aligned to come out of this crisis.
COVID-19 is challenging for all businesses and especially the lending industry. It is important not to panic but take this downtime to support your stakeholders and ensure you are ready for the digital future.
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