Coronavirus pandemic has become an unstoppable event that has hampered the economic activity around the world due to measures adopted to contain the virus. COVID-19 has left banks struggling to tackle the unforeseen sudden upheaval in the financial system.
Lockdowns, isolation requirements and closures have gripped the world to protect human lives and not to burden the healthcare systems. Supply disruptions, travel bans, collapse in commodity prices and capital flow reversals, countries are faced with high economic costs due to the loss in income for consumers and businesses worldwide.
Banks are on a lookout for ways to decrease and strengthen their losses to help the economy rebound. Moreover, banks need to modify their approaches and their budget to act in response to the crisis.
Central banks around the world
Central banks have been pushed into crisis-management mode. Central banks have been renowned for achieving inflation targets and for conquering the whims of the business cycle, their position was ruined by the global financial crisis of 2008 and the subsequent recession. An aggressive policy helped the banks to get out of the war. In the present coronavirus crisis, central banks are using unconventional monetary policy tools along with rate cuts and are going for emergency involvements.
Central banks are taking steps to smoothen the credit flow across households and businesses during this period. The central banks have responded aggressively to the tightening financial conditions and to halt in economic activity around the world. Several central banks have significantly expanded their asset purchase programs apart from the interest rate cuts.
While the Federal Reserve has been buying unlimited quantities of US Treasury debt and mortgage-backed securities and set up dollar swap lines with major central banks, the European Central bank has enacted 750 billion euros Emergency Purchase program to buy private and public securities in additional asset purchases taking the total to 1.1 trillion euros in 2020. Bank of Japan has launched a new lending provision worth 8 trillion yen.
What should banks do?
The aggressive interventions done by regulators come with certain costs and risks. The more robust is the lockdown, higher is the threat to liquidity and more likely the bankruptcies. These challenges are likely to persist even after the crisis subsides. A new set of challenges will emerge after the crisis for central banks, governments and households.
Hence, regulators drawing lessons from past experiences must pursue instruments to deal with natural calamities and bank stress incidents. Some of the pointers that bank supervisors can keep in mind during this challenging period are as follows-
- Stabilisation- The banks must establish a centralised operation to cope with all the issues that come up. The operation should take command of the organisation’s business plan and follow real-time assistance from the federal, state and the local government.
During the present challenging time of coronavirus health crisis, people need stability and consistency in things. Hence, all banks that might be planning on new roles, tasks and strategies in future can be put to a temporary halt.
- Increase communication- It also involves devising a communication plan and providing timely details and updates to customers and employees. Employees must be clearly communicated about their roles and business continuity plans. In the time of working remotely with employees, customers and supervisors; continuous conversation must be maintained between supervisors and banks. Liquidity and position of lenders become of key importance during the crisis period which necessitates reporting obligations in these areas must be augmented.
- Prioritise digital- At the time of massive lockdowns, the importance of digital banking solutions cannot be ruled out. From the opening of an account, catering of loan requests to the distribution of funds, the need for such urgent digital deliveries has never been felt before.
Hence, since now customers will have to use more of self-service tools due to reduced staff in banks, all digital features must perform well. However, banks must deviate from hiring a new tech supplier altogether at this period of time as a number of selling free access and enhanced utilization windows to the tools used by banks.
- Use buffers: Authorities must ease bank capital requirements. As per Basel 3 international capital framework, banks can build a buffer during good times and use that to absorb losses in bad times so that people continue to have access to credit during the crisis period. Hence, capital and liquidity buffers must support persistent lending.
Regulators have also lessened bank’s required liquidity buffers and told banks to operate below Basel-3 liquidity coverage ratios which is a fraction of high-quality liquid assets to short-term commitments. Some central banks have also reduced reserve requirements for the depository institutions to support liquidity and lending in the crisis period.
- Smooth NPA requirements- It is a standard practice for the banks to increase loan-loss revenues for borrowers who are not able to repay. But measures that need them to expand loan-loss requirements for a system-wide and transient shock can put considerable stress on bank’s capital and will not be macro-prudent policy.
Some regulators have given guidance on loan forbearance and directed banks not to downgrade borrowers if they are unable to repay due to COVID-19. Banks are also asked to take the help of the government in assessing borrower’s ability to repay. Sectors and borrowers that have been struck due to coronavirus outbreak must be given some leniency by postponing their loans.
Banks must step up and take initiatives to protect their countries to tide over the huge coronavirus crisis through easy loans and credit. They must work on scenario planning, communication, contingency planning and adjustments as needed.
A considerable uncertainty prevails regarding the duration and extent of lockdowns. Hence, banks need to prepare well in advance for the gravity of economic fallout and debt strains that will follow from the policy actions taken.