The estimated impact of the Coronavirus Crisis continues to be revised up.
Over the past couple of weeks, sequestered trying to minimize the number of fatalities, we have seen economic forecasts being revised, every time painting a more dire scenario.
Goldman Sachs and Morgan Stanley, for example, are forecasting a 24-30% drop for US’ GDP on Q2 and a jump in unemployment to double digits and a Global contraction this year (link).
The banks have responded. We have seen initiatives from “payment holidays” (link) to suspension of repossessions (link) to waiving of late fees (link).
These actions are praiseworthy – especially considering how often banks are seen as slow to respond.
Be vigilant on Cyber Security, Risk & Compliance
Increased reliance on online, constant changes in client behaviour, processes and protocols, prevalent and heightened vulnerable emotional state and workforce forcefully migrated in a hurry to remote work. The risk and cost of technology failures have jumped to a new level.
To make matters worse, tunnel vision and outcome bias may result in banks and clients alike paying even less attention to cyber risks.
Banks need to step up to protect themselves and their customers against this. And, besides the traditional levers in the Technology & Ops toolbox, in the short run, many banks will need to include tactical business decisions to limit scope to make risks more manageable.
Reprice your Risk
Reviewing assets and exposures, segmenting and increasing the frequency of updates for critical assumptions, rebalancing portfolios and redefining risk limits and estimates become even more important during testing times.
And, in most cases, these assessments will eventually need to incorporate new factors which were not baked in the original processes. Factor like: geographical exposure to account for the spread of the virus and the economic impact, sector exposure to account for the asymmetrical first and second-degree impact of the virus and response and indirect exposure to account for the impact on the health of clients, family members, and key men. Many banks do not have this data and never considered it when pricing risk during underwriting and will need to quickly add them.
Support your Customers and Stakeholders
Most customers will suffer the impact of this crisis profoundly. For some, it will impact their health and their families, which will also have economic implications – on top of the economic impact of the response to this crisis in lockdowns and scale backs.
Providing solutions to support these customers navigate safely to the other side of this storm with the bank is critical.
The good news is that many banks have already developed programs they can use for this: programs designed during other times of hardships (e.g. natural disasters, event-triggered downturns, etc.) which can be quickly adapted to the current set up.
As I said, many banks have started this process already. But in the weeks ahead, as the situation become clearer, banks will have the opportunity to move from reactive to proactive & strategic responses and see a significant increase in their effectiveness.
Likewise, banks will need to define how they will support their employees, vendors and other stakeholders.
Review your Strategy
Although it is too early to formulate an opinion about the implications of this crisis to the business of banking, some early indicators seem to point to:
The movement to digital will accelerate: China saw a significant growth in some part of digital financial services (link) and it is believed that, once banks make the investments to move products and processes online, most should stay online. Besides, as needs change, digital native solutions will have a competitive advantage to respond to them.
NIM models will emerge: While North American banks have been preparing for a World of zero or negative interest rates, this timeline was accelerated and some of the parameters like availability of deposits and effectiveness of bricks and mortar infrastructure to gather deposits and distribute financial products will need to be revised.
New battlefields will appear: Context banking has been a force in the sector for some time which, added to the emergence of new needs, may require banks to expand their thinking and scope of involvement to ensure that clients become better at managing their finances for situations like this, better at understanding and pricing risks and responding when crises hit.
