Firms must refine their transformation objectives, consider lessons learned from the pandemic and review their broader strategic agenda.
The COVID-19 crisis is an unprecedented global pandemic event, which has had dramatic impact on daily lives and the broader economy. In the global markets, the pandemic has brought significant dislocation with volatility and spikes in trading volumes, creating challenges in the primary, secondary, funding and derivatives markets.
As the impacts of COVID-19 continue to unfold and the crisis progresses, lessons can be learned from the events of 9/11, the global financial crisis of 2008/09 and several recent natural disasters. However, there is no precedent for the international nature and widespread effect on the global economy and the financial sector, specifically. The functioning of the investment banking (IB) divisions of financial institutions has also been significantly disrupted with the displacement of staff to a work-from-home environment, driving significant operating, cultural and business challenges.
The economic environment has severely impacted clients of the IBs. Corporate clients have faced significant revenue and cost challenges, requiring access to credit lines to maximize cash on hand and reduced capital expenditure. Institutional investors also have been affected by large surges in redemptions and falling asset values. National governments have introduced fiscal and monetary stimulus to offset the downturn in economic activity and to stabilize market confidence. In the US, this has led to financial institutions preparing to manage their business in a low and potentially negative interest rate environment, which had been prevalent in other economies prior to the pandemic.
Market volatility, volume spikes and demand for services alone would be challenging for IBs to navigate. The introduction of remote work has complicated the environment further. Most firms have the vast majority of IB staff working from home, including, notably, substantial portions of their sales and trading front-office workforce. With what has been essentially an overnight and prolonged shift to work from home (WFH), IBs have faced challenges in provisioning equipment at scale, supervising remote staff, enabling collaboration and establishing business as usual (BAU) in this extraordinary environment.
It should be acknowledged that IBs and the broader market infrastructure (including financial market utilities and third-party infrastructure providers) have demonstrated an impressive level of resiliency to date through the pandemic. The markets, overall, remain liquid, albeit volatile with significant value fluctuations, and operational processes have experienced a significant increase in volumes during this unprecedented time. However, the pandemic has exposed certain vulnerabilities and opportunities, which need to be addressed to enable greater resiliency, sustainability and efficiency for the IB.
With outlooks suggesting a prolonged impact to the markets and to daily life, the IB processes, client proposition, technology and business mix across the front-to-back value chain may look very different as we come through the pandemic and emerge into what will be a new normal. Key factors that will shape this new normal include:
1. Preparing a return-to-work strategy
Firms need to develop and communicate a clear return-to-work strategy. The strategy includes identification of the triggers to initiate return to on-premises working, the scheduling and timeline of bringing back functions and people, and clarity on the precautions taken to limit the risk of community spread and the potential for a re-emergence. Firms need to consider the relative operational risk of each function and the ability to maintain remote working across sales and trading, operations, risk management, control functions and beyond. The return strategy is the first stage in identifying longer-term strategic opportunities and priorities.
2. The need for a proactive postmortem
Firms should be proactive in undertaking a deep dive qualitative and quantitative review and assessment of performance through the crisis across front-, middle- and back-office functions. The assessment should identify vulnerabilities in their business from a performance, resiliency and control perspective resulting from the pandemic. The results of the assessment should outline a strategic road map to address identified opportunities and challenges on priority basis. It is expected a postmortem will also form a key pillar of the annual regulatory examination process, with many firms already receiving requests from their regulators.
3. Digital enablement of the workforce
The IB workforce is traditionally office-based, particularly in front-office sales and trading roles. The pandemic triggered a significant displacement of the workforce to work remotely. The transition to remote working highlighted a need for greater digital enablement through the toolkits firms provide to the workforce, both in hardware and software terms (e.g., virtual turrets, digitized workflows, collaboration tools, etc.). The manual processes that remain prevalent across the IB were particularly challenging to execute and monitor remotely.
Firms should take advantage of lessons learned from the pandemic and develop a more flexible location strategy where they can get comfort that processes can be sufficiently digitized to perform sustainably and be risk managed appropriately in a remote environment. Firms will also need to consider the cultural impacts and differences in managerial capability to appropriately enable a high performing culture in this new way of working.
4. Accelerated reshaping of business strategy
The pandemic will likely accelerate reshaping the business profile and client value proposition among the IBs. We expect to see a more active approach to client, region and business, acquisition and exit as firms reshape their product mix and focus resources on strategically valuable products, clients and geographies.
Firms are expected to shift the value proposition offered to clients, with an increasing emphasis on data-driven and analytical offerings, digital toolkits and electronic market access. There could be an emergence of a digital-first business model, with a primary focus on electronic trading and the associated digital offerings, to service low touch, high frequency or cost sensitive clients. Such strategic move will require a further cultural shift in how IBs serve and service their clients as the focus becomes selling the platform and not a transaction.