Effect of COVID 19 on Financial Institutions

20 May

Impact of COVID 19 on individuals, communities, and organizations is rapidly sprouting. A recent article posited four different scenarios for the global economy resulting from COVID-19, which ranged from a mild and temporary hit to the worst-case scenario, a global financial crisis. Here are the few notable concerns.

Indeed it is unfortunate that COVID-19 arrived when the global economy was already showing signs of a slowdown.²
Apart from the effect on the supply and demand side, COVID-19 has already shaken financial markets. Since February 21, 2020, bond yields, oil, and equity prices have sharply fallen, and trillions of dollars, across almost all asset classes, have sought safety.
In the United States, 10-year bond yields have tumbled below 0.5 and equity prices on major stock indices around the world have fallen.
It appears, as of now, that the markets are trying to price using the worst-case scenario, which has increased volatility recently.
With the continued shocks to the supply and demand side, there is potential for further market disruption.
Institutions and individuals may be experiencing liquidity stress, including limited access to credit.
This might, in turn, increase the probability of default, especially near or in the speculative grade of corporate debt. Private debt, including corporate and household debt, has reached record levels recently, and approximately one-half of the investment-grade market currently holds a triple-B rating.
Many banks are also acting as responsible citizens by extending loans to hard-hit borrowers, renegotiating credit terms, and even donating face masks to their clients.
Beyond the operational actions already underway, banks and capital markets must remain hyper vigilant.
They need to also actively consider the short- and medium-term financial, risk, and regulatory compliance implications that are resulting from the continuing uncertainty around COVID-19.

Effect of COVID 19 on Banks and Financial Markets:

Topic/issue	Current and potential developments	Relevant questions	Actions banks and capital markets firms should consider
Branch/ATM operations	As the pandemic advances, some branches/offices may need to close temporarily, or employees may not want to come in to work. ATMs may need to remain open and have enough cash to dispense.	How can banks ensure operational consistency with branch/office operations if there are temporary closings or employee absences? How can branches sufficiently replenish cash for ATMs?	Consider reducing branch hours or, if possible, utilizing only drive-through operations. Assess opportunities to deliver services solely through digital channels.
Trade compliance	Many institutions already have traders working from home and remote offices, and some regulators such as the Financial Industry Regulatory Authority (FINRA) have temporarily waived rules in this regard. Meanwhile, the United Kingdom’s Financial Conduct Authority (FCA) has stated that all firms are expected to meet their regulatory compliance obligations regarding trading orders transactions, timely entry of orders, using recorded lines, and giving staff access to compliance support.	What flexibility might regulators grant that would enable traders to work from home? What systems/tools/support need to be provided to traders who may be forced to work from home?	Be in close contact with industry groups, such as the Securities Industry and Financial Markets Association (SIFMA), and regulators, such as the Commodities Futures Trading Commission (CFTC), National Futures Association, and the FCA, for information and updates on obtaining waivers. Work with vendors to set up alternate recording