Safeguarding banks amid Coronavirus pandemic

  • Apr 24, 2020 AEST
  • Team Kalkine
Safeguarding banks amid Coronavirus pandemic

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.

ALSO READ-  COVID 19 Stimulus Packages & Donations- When Pandemic Strikes, Government & Philanthropists Unite!

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-

  1. 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.

  1. 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.

 

ALSO READ: Economies On COVID-19 Fight, Will Their Measures Suffice?

 

  1. 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.

 

  1. 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.

 

  1. 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.

 


Disclaimer
The website https://kalkinemedia.com/au is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) or engage in any investment activity under discussion. We are neither licensed nor qualified to provide investment advice through this platform. All pictures are copyright to their respective owner(s). Kalkinemedia.com does not claim ownership of any of the pictures displayed on this website unless stated otherwise. Some of the images used on this website are taken from the web and are believed to be in public domain. We have used reasonable efforts to accredit the source (public domain/CC0 status) to where it was found and indicated it below the image.

 

There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.

CLICK HERE FOR YOUR FREE REPORT!
   
x
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK