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The sudden outbreak of the COVID-19, the novel coronavirus pandemic has led to a severe lockdown. The sudden shutdown of the multiple industries and businesses has threatened and disrupted the global economy and financial markets. COVID-19 has ushered in a recession after more than a decade of stable economic growth. The world economy is poised to lose trillions of dollars of losses in GDP due to the outbreak.
The sudden advent of the unforeseen events could lead to certain uncertainties surrounding trade and commerce, manufacturing, services and global demand and supply as a whole. The travel & tourism industry has been especially battered as people are being told on limiting contact to check the spread of the profoundly infectious COVID-19 respiratory disease. The banking sector is a mirror of the whole economy. And banking is expected to bleed massively as all clients- corporates to small businesses struggle to survive.
The monetary and fiscal policies are not designed in such a way that it can offset the disruptions caused by a sudden pandemic on the economy. Governments and policymakers around the world in the United States, Europe, and Asia are taking certain measures to offset the impacts caused by the pandemic by slashing interest rates but still this cutting down of interest rates cannot boost spending on the part of the quarantined people or restart operations of shutdown factories or businesses.
The governments are enforcing proven public health measures such as social distancing in order to physically disrupt the contagion. Their measures have in turn severed the flow of people as well as goods and stalled economies. The entire financial ecosystem, banks, businesses, industries, etc. are facing the brunt of the pandemic. The COVID-19 outbreak has pushed down economies around the globe in a deep trench. The head of the International Monetary Fund declared that “it is clear that the global economy has now entered a recession that could be as bad or worse than the 2009 downturn”.
The Fed has been extremely aggressive and pro-active. The Congress has passed the historic $2.3 trillion rescue package to directly support consumers and small businesses. $349 billion of it is through the innovative Payroll Protection Program for small businesses.
Despite all the support from the government and the Federal Reserve, these are tumultuous times and banks need to make sure they are on the right side of the history this time around. The following points should help banks survive the crisis and emerge stronger:
- Capital Buffer: The benchmark KBW Bank indexes were down 25% by the end of March, double the wider market fall. But credit analysts believe that all the major banks have appropriate levels of a capital buffer to sustain the pressure of COVID-19. But smaller banks need to make sure that there is no asset-liability mismatch during the pandemic as a capital lifeline for a bank seems unlikely. Suspending buyback and even the sacrosanct dividends is a good idea as it helps shore up capital.
- Workforce management: Ensuring that the bank staff is safe and has the tools to work effectively from home will be critical to ensure that banking can run as usual for at least the basic financial services. In the case of some banking activities that need the staff to be in the branch, make sure that all office space is well sanitized and workers have a proper understanding of the social distancing norms. Creating a framework for safe work and work from home is critical. Those firms who had invested aggressively in digital and have been automating their processes will see big gains. Traditional banks which are still dependant on the human touch will find it tough to survive.
- Customer Support: Clients of all sizes will see a major hit to their cashflows. Banks will need to work with customers to offer payment holidays or other support during such a force majeure event. Utilizing government support especially the Payroll Protection Program is critical for supporting small businesses. Banks need to make sure the compliance is at the highest level as such a crisis emboldens bad actors trying to take advantage of the situation.
- Spreading the Pain: Yes, the banks will feel their fair share of pain. But it is essential that banks spread the pain by doing aggressive budgeting. This is not the time to lay off staff. But all discretionary spending, big bonuses, marketing should be temporarily stopped to refocus operations. The management team can set the tone by taking pay cuts. It is critical that bankers and top management are appreciative of the pain of the normal customer and business on the street and takes appropriate measures to support them.
Predictions are that this pandemic-induced recession will cause more economic pain than the 2008 global crisis and the after-effects will continue to linger on for a longer period than it was earlier being estimated. Questions also arise on the fact that how long will it take for businesses as well as consumers to bring back their confidence and recover from the crisis. Certain policy measures undertaken globally by the governments, central banking authorities and finance ministries in this respect will be helpful but not too much extent, especially in the short term. The recovery of the economy will take time. Banks that had invested in digital, had adequate liquidity and most importantly were able to efficiently able to manage the trifecta of borrowers, staff and regulators will be the big winners of the COVID-19 crisis.
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