Is the banking industry stable amid the coronavirus outbreak?

Banks certainly have their hands full in the light of the novel coronavirus disease outbreak. Borrowers and businesses face job losses, slowed sales, and decreasing profits as the pandemic continues to spread around the world. Banks’ customers start seeking financial relief, mortgage holiday, and national banks’ support. Governments encourage commercial banks to ease their clients’ financial burden by all possible means. 

In addition to operational and workforce challenges caused by coronavirus effects, banks have to administer the ungrateful subsidies distribution duty that was assigned to them by the government. Nonetheless, banks seem to be the most prepared for sudden downturns due to the financial crisis in 2008. And, being the circulatory system of commerce, the banking system can become the saving boat, if coronavirus pandemic doesn’t last long to empty it.

The coronavirus disease crisis might have given banks an opportunity to repair their public image that was corrupted during the financial crisis of 2008. But it also brings new reputational risks. 

As the transmission mechanism for doling out state aid, they will be required to perform a thorny task: deciding which companies should receive financial assistance and which would have struggled to survive regardless of the virus, and should, therefore, be cut loose. “Picking winners and losers” role could provoke a long-term public and political backlash against the banks.

Regulators around the globe understand the challenge and are already relaxing rules for banks. For example, on March 12 the European Central Bank (ECB) announced that banks can fully use their capital and liquidity buffers. Banks will be temporarily allowed to operate below the level of capital defined by the Pillar 2 Guidance, the capital conservation buffer, and the liquidity coverage ratio. The ECB also recommended that national authorities relax their required countercyclical capital buffers.

In Asia, the Bank of Japan has loosened the monetary policy through conducting various operations including purchases of Japanese government bonds, US dollar funds-supplying operations, exchange-traded funds, and real estate investment trusts. 

In the United States, regulators have offered support to firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner. It states that these buffers were designed to support the economy in an adverse situation. This will also allow banks to continue to serve households and businesses.

Balancing on the string, or banking industry challenges

The ongoing coronavirus effects are being felt in almost every sector. From retail and consumer packaged goods to entertainment, sports, and of course travel and leisure. The banking sector is being impacted by coronavirus as well and is facing down its own unique challenges.

Banking industry analysis shows that the financial services sector is currently facing challenges on multiple fronts: 

  • Shelter-in-place and social distancing requirements mean that few customers are able to be served in a physical branch that causes additional strain on channels like telephone support, online and social media.
  • Record numbers of people are frantically trying to get in touch with their financial services providers with questions, concerns or to request special measures. Clients are anxious that their finances have been impacted by the coronavirus pandemic because many have lost jobs, seen their incomes evaporating. People are in fear of defaulting on loans or missing mortgage payments. Businesses are in need of additional help as well because many of them have seen their revenue drop dramatically or vanish all together. 

Banks have already taken a series of actions in reaction to the spread of COVID-19. Common steps taken include establishing a central task force, suspending travel, curtailing large-scale gatherings, segregating teams, making arrangements for teleworking, and refreshing policies of interactions with external vendors. 

Notwithstanding the pessimistic forecasts, banking industry statistics look far better than it has been before the financial crisis in 2008. But at this stage banks should concentrate on 3 crucial tasks:

  1. Normalize workforce measures for multi-month sustainability.
  2. Provide essential banking services to retail consumers.
  3. Fulfill a social mission to support households and businesses with credit.

Coronavirus outbreak after-effect on banks. What to expect?

It is expected that performance of banks and financial institutions will be hit across all dimensions, such as fees, interest revenue, losses, and expenses. However, variances will be substantial by sector and customer segment, with details depending significantly on the scenarios that ultimately unfold. 

While the exact financial impact of the coronavirus crisis remains highly uncertain, banking industry future is sure to face the following consequences:

  • Fee income will fall, caused by lower consumer spending in retail businesses, decreased assets under management in asset-management divisions, as well as a slowdown in investment-banking activity. Some sales and trading businesses may be an exception: fixed-income flow volumes may increase.
  • Net interest margins will remain compressed, as interest rates remain low or fall even further. Any increase in borrowing volumes, for instance, may be offset by changes in credit portfolios.
  • Credit losses will increase across most sectors, across small businesses and in certain retail segments (for example, self-employed workers, hourly-wage earners, uncollateralized products). Travel, tourism, and entertainment segments will be severely hit. Oil and gas lending may also be challenged, with ultimate outcomes depending heavily on geopolitical factors affecting oil production and price. Across all industries, smaller and less efficient businesses will be hit disproportionally.
  • Remote work may increase costs for setup and may lead to lost wages normally paid to hourly workers and contingent staff. Operational losses due to fraud are also likely to increase.


New rules forced banks to reduce their reliance on borrowed money and build up their capital reserves. They have quite a lot of resources to burn before they hit the wire. But the longer the crisis lasts, the greater the risk that those resources will run low.

Wim Mijs, chief executive of the European Banking Federation, an industry group says that banks can hold out at least for some time. But if the whole economy is brought to a stop for six months, he is not sure what could happen next.

The situation will require constant, careful handling from finance companies and banks as they seek to reassure consumers, respond to their concerns, and earn their trust during this volatile period.

Sergei Artimenia

Director of Business Development

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