Coronavirus and the disruption it has caused have serious implications for the financial services industry, but will we see a financial crisis?
The impact of the global Coronavirus pandemic has been felt in every nation and every industry. The virus, declared a global pandemic by the World Health Organisation (WHO) is highly transmissible and has spread rapidly - as of 19 March there are 225,252 confirmed cases and more than 9,000 deaths.
Like all industries, the finance sector has been impacted. Towards the end of February, for example, stock prices plummeted due to concerned investors and the price of Bitcoin dropped to a three-week low, sinking below $8,700 and representing a drop of nearly $2,000 in two weeks (correct on 27 February).
After, the week of 8 March was the most volatile seen on Wall Street and in the UK markets since the financial crisis of 2008. Those turbulent few days saw 2,000 points wiped off the Dow, the FTSE having its worst day since 2008 and the price of crude oil falling by 30%.
The subsequent fears of recession have, at time of writing, not come fully to fruition but ongoing disruption and closing down of global economies means this is still likely. David Wilcox, former head of research and statistics at the Federal Reserve Board told CNN Business “Whereas 10 days ago there was some legitimate uncertainty about whether the global economy was in the process of going into recession - 10 days later, there’s no question that it is.”
A precarious path ahead
According to Leadership in the time of coronavirus: COVID-19 response and implications for banks, by McKinsey, “the path ahead is a precarious one”. In response to the above challenges, a wave of measures have been implemented by banks and the wider financial services industry including “fiscal stimulus steps, rate decreases, liquidity measures, and relaxation of capital rules”.
McKinsey states that banks have a role to play as systemic stabilisers, particularly as a high number of homes may be susceptible to the effects of coronavirus measures.
It says: “Addressing the situation will require further global action and public–private coordination. Banks will play a critical role in this for their customers, their employees, and for the economy at large. Cash and deposit services, credit extension, payment facilitation, and market making are all essential services.”
McKinsey’s recommendations for banks
McKinsey recommends that, in the immediate term, banks plan for an “acute period of multiple months, spanning their entire footprint, and with a view of all stakeholders”.
They should also stress test their infrastructure, their capabilities and processes in order to better understand the long-term strategic implications of coronavirus.
McKinsey recognises the actions already taken by banks and financial institutions.
These include, but are not limited to, the establishment of a central task force, suspending gatherings and cutting travel, making arrangements for remote working and “refreshing external vendor interaction policies”.
Beyond this, it says, banks should take three immediate steps:
- Normalise workforce measures for multi month sustainability, including considerations around data security, cybersecurity, fraud and safeguarding customer and personal information.
- Provide essential banking services to retail customers. Regardless of coronavirus containment measures, customers will need banking services. Banks should therefore continue branch and ATM operations where possible, particularly as the more vulnerable members of society such as the elderly may be less likely to use digital banking services. Despite this, banks should also encourage customers to use digital channels and mobile banking options where possible.
- Support households and businesses with credit. In the US, according to McKinsey, 74% of workers say they live from paycheck to paycheck, illustrating the impact that prolonged periods without work due to coronavirus could have. Banks should, it recommends, rapidly identify most affected sectors and customers to understand how they can provide the best support.
Stress testing financial plans
Financial institutions will be hit across all dimensions, says McKinsey. However, the exact implications are not yet known but it anticipates a fall in fee income, net interest margins will remain compressed and credit losses with be elevated.
Accordingly, banks should apply testing tools and close monitoring techniques based around five key imperatives:
- Prioritise and iterate
- Reverse stress test to identify worst-case scenarios
- Develop scenarios based on possible virus spread
- Understand the existing performance assumptions in current models
- Incorporate implications of near-term actions
Read the full version of McKinsey’s insight here.
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