COVID-19 presented a massive challenge to the banking and capital markets industry on many fronts. In 2020, financial leaders had to contend with multiple problems concurrently, each of which could have been catastrophic in their own rights:
- Financial impact on operations, future periods, capital resources and liquidity
- Potential global recession
- Effects of workforce reduction on productivity within industry
- Decrease in consumer confidence and spending
- Supply chain disruptions
- Difficulties with funding
- Lacking information necessary to make informed decisions
- Impacts on tax, trade and immigration
- Cybersecurity risks
- Fraud risks
The Industry Responds to COVID-19 Reverberations
When COVID-19 first began to spread in Europe in early 2020, it became clear that pre-existing macroeconomic conditions in various regions would be faced with pandemic setbacks and create devastating fallout. Regions that already had high debt burdens, high tourism areas and other hard-hit industries and healthcare systems were especially susceptible to the economic fallout.
Before the pandemic, central banking institutions — including the U.S. Federal Reserve and the European Central Bank — had already cut interest rates to historical lows, which limited the ability to add liquidity to governments that needed money to support citizens through the pandemic. The banking industry is vital to supporting economies and businesses in its multiple roles as credit grantors, payment facilitators and deposit gatherers.
Consequently, the onus fell to banks to stabilize their customers, employees and national economies. Banks did this through more flexible lending, credit extension, loan modifications, cash and deposit services and bill payment facilitation. National banks and community banks also worked with the U.S. government to facilitate Paycheck Protection Program (PPP) loans to small businesses. In other words, the financial stresses of businesses and individuals all filtered down to banks.
Internal Banking Complications
However, the banking industry dealt with its own internal crises during the pandemic. Many banking employers suspended in-person work and gatherings, promoted health measures to limit the spread, shut down travel and found new means to continue work, such as telework to protect employees.
Non-executive employees who worked directly with customers did not always have the opportunity to work remotely. In the financial markets, essential workers had to continue working, often in unsafe environments because of technology and compliance requirements. Banks had to quickly develop backup plans from the top levels of leadership and submit them for regulatory clearance. Local managers had to stress-test these plans, as well as mitigate the risks of cyberattacks, fraud and data privacy intrusion. At most banks, one of the common plans was to shift as many customers to virtualized banking channels as possible, and there were long-term benefits to this shift.
The distilled business impact on banks ultimately included lower fee income, decreased assets under management, compressed interest margins and losses in credit portfolios in both business and individual lending.
COVID-19 Radically Alters Risk Models
Today's banking industry is built on data and risk assessment models. The pandemic forced leaders to plan for a number of unknown variables, including the length of the pandemic, what recovery would look like, which businesses and individual customers would recover at all and their respective timetables. Banking went from a business that could only support a low percentage of non-performing loans to one forced to deal with uncertainty and capital depletion.
Of course, banks had contingency plans for natural disasters and even medical epidemics. While many banks had learned from previous recessions, a global pandemic was beyond the contingency planning capabilities of most governments and central banking institutions, let alone national and community banks. In mid-2020, the EY Future Consumer Index showed that nearly a quarter of respondents thought it would take years for the industry to regain its financial security and confident footing.
How Leaders Are Preparing for the Future
Right now, the industry is focused on doing all it can to help individuals, businesses and governments regain financial stability. There are several approaches that industry leaders are contemplating that can collectively help to make banks and financial institutions more beneficial to customers in the future when disaster strikes again. These include:
- Investment in end-to-end digitalization to automate internal operations and customer processes
- Flexibility with portfolios, rather than on a product level, to help clients dynamically manage their finances and take loans from their own long-term portfolios
- Using advanced risk management and analytical capabilities, so banks can become advisors for their business clients and offer data-driven insights
- Working with a distributed workforce to reduce physical office space investment costs and become leaner businesses
- Work with stakeholders and partners to re-envision a more flexible supply chain
As of mid-2021, COVID-19 vaccines are helping to stabilize world health and financial markets, but banking leaders are still bracing for continued turbulence. It is clear, though, that leaders of banking institutions are more vital to economies, businesses and individuals than ever before — and how the industry emerges from this crisis will go a long way toward determining how the world recovers from COVID-19.
Learn more about the University of North Carolina at Pembroke's Master of Business Administration with a Concentration in Finance program.
EY: How Banks Can Successfully Emerge from COVID-19
Federal Deposit Insurance Corporation: Our Response to the Coronavirus Pandemic
McKinsey & Company: Leadership in the Time of Coronavirus: COVID-19 Response and Implications for Banks
PricewaterhouseCoopers: COVID-19 and the Banking and Capital Markets Industry
Have a question or concern about this article? Please contact us.