Covid-19 and the banking world: a positive paradigm shift?
The current crisis is exceptional: global, unprecedented, and impacting all citizens and economic players. Our personal and professional habits are being disrupted, pushing us to go beyond our limits in terms of creativity and solidarity. Beyond the disruptive health aspects, it can nevertheless be a formidable vector for new practices, accelerating profound changes that will transform the bank of tomorrow. How can we turn this paradigm shift into an opportunity for banks?
The health crisis has necessitated a drastic change in working methods to guarantee the continuity of operations in a home office model.
Pandemics can extend from a few weeks to a few years, can die and rise again. A Business Continuity Plan is generally based on episodic events with short recovery time. In this sense, this crisis doesn’t incorporate the usual risk models.
Organizations had to account for and adapt to a variety of scenarios which have been triggered at different stages.
Typical pandemic scenarios are strictly limited to employee absenteeism, whereas Covid-19 has enforced social lockdown and “strongly recommended” working from home practices which have moved the goal posts and led to increased cyber risks, that must be tackled.
Another key specificity is that this crisis has stressed the interdependence of various risk natures. When a classic BCP plan usually impacts a single organization, now all partners, suppliers and customers are affected, increasing market, credit and liquidity risks.
Among the continuity measures deployed, the implementation of firm-wide home working has required firms to re-evaluate the connectivity model and capacity in a very short timeframe. Two extremes were noticeable in this regard. On the one hand, FinTech industries for example, whose nomadic and digitalized organizational structure doesn’t link them to a production site, have quickly adapted to working from home. On the other hand, traditional financial industries, which are more dependent on a specific location, had to readjust the way they work remotely. Therefore, the crisis questions the real importance of the production sites model in the financial sector, where managed stocks like cash and securities have mainly been dematerialized.
Nevertheless, some areas of the financial industry, especially market facing activities, still have specific organisational processes which require permanent interaction between people to manage risks and priorities efficiently. This is especially true in period of crisis when trading volumes and amounts are significantly higher.
The stock market crisis, with falling prices, a massive increase in transaction volumes and increased volatility, put a severe strain on market facing activities.
Collateral management desks are a good example of business areas where the current crisis creates an operational resource shortage when the activity level increases. Higher market volatility combined with a decrease of the asset value, means a rise in margin calls and in the need of collateral.
In the context of growth of collateral need, the available liquidity of investors may be impacted: collateral delivered in cash or liquidity is used to buy additional HQLA, necessary to secure existing engagements.
Investors are impacted twice, as the need for collateral also creates additional cost when our governments provide a refinancing boost. Additional cost for the collateral receiver of cash balance is induced as a result of a negative interest rate. The collateral provider of HQLA has to bear low or negative rates. And such a need in increased HQLA, helps our governments to continue to finance themselves at a good price.
The current crisis is an opportunity for the financial industry to update the collateral framework.
We know that the economic recovery will potentially delay the efforts regarding the sustainability of our world, especially with cheaper carbon energy. Therefore, it may be the right time for the authorities to enlarge the collateral eligibility and to promote high quality green bonds as HQLA equivalent and thus continue to support ESG initiatives.
For cash collateral cost, it is time to stop considering this as a fatality. Collateral reuse or reinvestment opportunities exist. We are in an ideal timeframe to implement a cash sweeping solution to ease cash collateral reinvestments programs in eligible cash equivalent assets at reduced cost.
"The current crisis is an opportunity for the financial industry to update the collateral framework. "
Furthermore, the management of the economic crisis, because of its magnitude, must today be the absolute priority of banks, in order to enable them to play their major role in supporting economic activity, and be part of the solution to this crisis, alongside the Member States.
To support the sustainability of businesses, banks need to provide the necessary liquidity to overcome financial difficulties. While the levers are classic, their implementation is complex in view of the volume to be managed.
The quickest and most appropriate is the standstill period, usually for up to 6 months. But the granting of new credits is more problematic because it requires a reinforced analysis in order to target the right debtors: not over-indebting the economy and generating too many post-crisis bankruptcies, only covering needs related to the crisis and not previous difficulties or endorsing risky speculative activities.
To cope with the volume of files to be processed, in addition to taskforces, banks are also taking the measure of the interest of robotic solutions allowing automated mass data capture and reporting (RPA). If many banks are not yet equipped with these tools, several banks are working today on these solutions to serve them in the future.
But RPA is only a first step, this crisis being a real accelerator for innovations.
So many amazing new habits have emerged during the crisis: contactless lifts commanded by phones, usage of big data and geolocation to track infected people and identify their presence in the neighborhood, deliveries by drones, etc.
Due to social distancing, these new practices spread among all segments of the population, even older people. One of the most shared is the enlarged usage of contactless mobile payment. Does it mean the end of credit card? What will be the next level of contactless banking process?
If we are not yet able to anticipate the impact of these changes in our future day to day life, what we can already predict is that banks will have to take the measure of these new habits and redesign their client processes without contact. Furthermore, they should also take advantage of this accelerator factor, to leverage new technologies (big data, machine learning, etc.) and integrate them into the design of their future processes and increase both efficiency and client satisfaction.
The current unprecedented crisis can therefore be seen as a vector for rapid transformation and innovation, and it is a unique opportunity for financial institutions to reinvent themselves.