Banking on it: building a post-pandemic future

COVID-19 RESOURCE HUB  |  Financier Worldwide

BANKING, FINANCE & INVESTMENT

As thoughts begin to turn to the make-up of a post-pandemic world, the input of key sectors and industries will prove crucial in helping global economies to recover from the devastating impact of coronavirus (COVID-19) and build for the future – with the banking industry a likely benefactor.

“The banking industry has a crucial role to play in helping the global economy weather this crisis and return to growth,” notes Oliver Wyman’s June 2020 analysis ‘Steering Banks Through the Crisis: the COVID-19 Pandemic Navigator’. “Yet banks face an enormous challenge in supplying the economy with credit: dealing with the uncertainty of future creditworthiness and how this will be affected by the course the pandemic takes.”

Thus far, the impact of COVID-19 has been unquestionably enormous. According to June 2020 analysis by the World Bank Group, the economic damage inflicted by the pandemic is already evident and represents the largest economic shock the world has experienced in decades.

In its ‘Global Economic Prospects’ report, the World Bank details the enormity of the economic meltdown, revealing both the immediate and near-term outlook for the impact of the pandemic and the long-term damage it has dealt to prospects for growth. The World Bank forecasts a 5.2 percent contraction in global GDP in 2020 – in other words, the deepest global recession in decades, despite the efforts of governments across the globe to counter the downturn with fiscal and monetary policy support.

Drilling down, the World Bank expects the pandemic to plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. Furthermore, advanced economies are projected to shrink 7 percent – a drop that will, in turn, impact emerging market and developing economies, which are forecast to contract by 2.5 percent. Overall, this contraction, observes the World Bank, would represent the weakest showing by this group of economies in at least 60 years.

Over the longer term, the World Bank suggests that the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages.

“The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations and set the stage for a lasting recovery,” says the World Bank. “For emerging market and developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.”

However, in order to chart toward building a resilient, post-pandemic future, the banking industry must first determine what effects of COVID-19 will persist. “Critical decisions need to be made now based on an understanding of the increased risk across the economy, with differentiation across individual businesses and consumers suggesting which impacts are temporary and which are permanent,” states Oliver Wyman’s analysis. “This will not be like a normal recession; the impact will be highly asymmetric and influenced by public policy decisions.”

According to Oliver Wyman, there are four challenges banks face with regard to supplying credit. First, how to incorporate all the new and constantly changing information on the pandemic and manage against a complex set of scenarios. Second, understanding the impacts of COVID-19 over time across each corporate sector, given their financial condition and future consumer demand. Third, managing consumer credit portfolios when traditional indicators of payment behaviour are distorted and payment capacity is highly uncertain. Finally, banks must upgrade their models to support loan loss provisioning and capital requirements, with only intermittent regulatory guidance.

To meet these challenges, banks are rapidly developing a wide range of new tools and capabilities to deal with the new COVID-19 reality. According to Oliver Wyman analysis, new epidemiological and macro scenarios are unfolding, and banks are tapping new data sources to understand the impacts.

“Maintaining consistency now becomes critical to enable senior management to steer,” the analysis suggests. “The same planning assumptions should be used across retail, small business and large corporate segments. The same signals being used to make forbearance and lending decisions on the front line should be rolling up into credit management, loss forecasting, and capital management.

“In effect this means the entire credit and balance sheet management architecture of banks, built over decades, is being upgraded in a matter of months,” continues Oliver Wyman. “The banking system is rising to this challenge. But the stakes are high. The effective supply of credit, and therefore the robustness of the economic recovery from the crisis, will depend on how well banks manage to adjust to these intensely challenging conditions.”

A Deloitte report, ‘Maintaining Balance Sheet Resilience: COVID-19 implications for the banking and capital markets sector’, contends that banks are in a better position now to provide a solution than they were at the start of the 2008 financial crisis. Their strong liquidity positions allowing them to channel stimulus money to the real economy, i.e., companies and consumers. That said, Deloitte recognises that the banking industry faces uncharted operational challenges as it takes unprecedented action to aid banking and capital markets.

Clearly, the banking industry has a crucial role to play in helping the global economy weather the catastrophic impact of COVID-19 and get it back on the path to growth. Given the enormity of the challenge, banks can do much to help global economies navigate inevitable uncertainty over the months ahead. The industry’s clout and expertise will guide critical decisions that need to be made.

“Looking at the speed with which the crisis has overtaken the global economy may provide a clue to how deep the recession will be,” suggests the World Bank. “The sharp pace of global growth forecast downgrades points to the possibility of yet further downward revisions and the need for additional action by policymakers in coming months to support economic activity.

“Global coordination and cooperation – of the measures needed to slow the spread of the pandemic, and of the economic actions needed to alleviate the economic damage, including international support – provide the greatest chance of achieving public health goals and enabling a robust global recovery.”

© Financier Worldwide

BY

Fraser Tennant