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Coronavirus: What could Banks and Other Financial Institutions Do to Withstand the Crisis

Coronavirus: What could Banks and Other Financial Institutions Do to Withstand the Crisis

The COVID-19 pandemic brings up a strong challenge to the people from all walks of life. The volume of the impact is tricky to comprehend at this juncture, however, based on the previous analysis and taking the major steps taken by the government at the global level into consideration, it is anticipated to be very drastic.

Banks and financial institutions are the most important pillars for managing economic activity and ensuring the regular delivery and supply of basic needs for the people especially during times of crisis. Looking at the gravity of the situation, the existing regulations immediately need a transformation and introduction of special incentive schemes to resist economic apocalypse. Further adding to the problem, even the non-banking departments in the financial markets who are exempted from liquidity schemes may also play their role in negatively affecting the banking system.

Let’s look at the following key instruments of the financial institutions and how it should be dealt with to mitigate the crisis:

Capital 

The economic blow should be considered at retail as well as a corporate sector which may severely affect the financial markets leading to the potential failure of financial firms. Although capital buffers have already been slackened by the authorities, more strict measures are expected especially in terms of capital ratios, loan portfolios and so on. With regards to the capital, the following factors must be ensured:

  • Activate prospective measures to a greater extent with dire recovery plans.
  • Potential capital abrasion up to 6 months should be considered.
  • The group capital repatriation option should be reassessed.
  • Evaluate and analyze leverage limitations and probable suspension/relaxation.
  • Immediate deferral of staff bonuses and dividend payments could be considered.

Liquidity 

  • Regular assessment of short term liquidity position can be done while taking into consideration the availability of central bank facilities.
  • Regular interaction with important financial regulators to assess the position and discuss emergencies.
  • Arrange emergency sources of liquidity and be prepared to use them.
  • Have discussions with regulators regarding the usage of liquidity buffer.

Impact on Operational Capacity

The operational capability of many of the financial institutions will get affected in some cases. In many cases, this will have enervating service intimation for customers and other parties. The authorities of developed countries require a strategically-made framework. Firms may need to make their own set of plans with regards to their counterparties, suppliers, and customers. Due to the unpredictable nature of the health crisis, the firms need to quickly strengthen systems and functional resilience such as reducing reliance on the sources of services located only in one country, rather have alliances with suppliers from different geographical locations.

Customers 

As witnessed, COVID-19 is adversely impacting the economy and will continue for a considerable amount of time with majorly affecting business fraternity especially in the hospitality, entertainment and tourism sector. Looking at the consumer space, it is certain that they will have limited options as the Micro, Small, Medium and even the large corporates are undergoing losses. It is expected that customers could challenge contractual obligations on several grounds because of COVID-19.

Financial Infrastructure

The members and providers working in financial infrastructure could face various operational disturbances and defaults as an outcome of intensified enforcement activity. Markets will be tensed and venues of trade may be direly damaged. Firms should evaluate the infrastructure most important for their functions and maintain a close discussion wherever it could be most suitable and necessary and have alternative providers ready in case of any emergency.

Government Guarantees/Regulatory Incentives 

Considerable changes in the regulations and incentives by the central bank is highly expected to ensure the continuous flow of funds in the real economy with special attention given to the micro, small and medium entities. It is significant that firms adjust to global strategies and assess them properly in order to notify their business and risk appetite in relation to customers and in-scope businesses. This also involves supporting regulators and governments for exemption wherever necessary including firms with an important perspective of the market. Although, several novel measures are required to intensify the scope of intervention.

Conclusion 

The government and financial institutions have taken several pertinent measures so far to mitigate the crisis. But the question is- are these regulations and incentives enough especially when the problem is utterly unprecedented and unpredictable? The only solution that seems feasible in the current situation is the constant amendment of the regulations based on the detailed evaluation and analysis of the prevailing situation. Several regulatory rules would be reconsidered in order to keep the situation stable. Patience, forbearance, prudence, and sensibility are the only factors that can help authorities and banks to efficiently combat the crisis.