Three themes emerge as banks navigate through the COVID-19 crisis

Global financial leaders discuss current challenges and the longer-term financial, risk and regulatory compliance implications.

Tapestry convened the Bank Governance Leadership Network (BGLN), including EY Global Financial Services leadership, bank non-executive directors, regulators and other executive leaders for two calls in late March to discuss some of the biggest challenges they are facing and to share views on longer-term financial, risk and regulatory compliance implications. These themes emerged from the discussions:

1. The crisis is testing operational resilience and continuity planning

The COVID-19 outbreak is testing banks’ operational resilience and continuity planning in unprecedented ways. With more customers and employees working remotely, banks are working hard to ensure their safety by reorganizing workflows and considering extreme scenarios not often built into existing business continuity plans: for example, the global scale of lockdowns limiting economic activity. The sudden surge in customer inquiries, however, is straining support infrastructure.

Participants are mindful of the stresses such a challenging environment can inflict on employees. Operational resilience has been strong but remains a source of concern. Participants largely agreed that banks have handled the shift to remote work surprisingly well thus far. Business continuity appears to be standing up, although no one could have anticipated the scale and global impact of COVID-19. Cybersecurity could also be an issue. “We haven’t seen an uptick in cyber activity, but we are watching very carefully,” said one director.

2. Banks will play a critical role in the policy response

Banks are at the center of the economic response as policymakers and regulators worldwide take steps to ease the financial impact of the COVID-19 crisis.

Regulators are adjusting requirements

To give banks more flexibility to supply credit and support the fiscal response from policymakers, regulators are reviewing their agendas and priorities. Some are relaxing regulatory requirements, while others are providing new supervisory guidance. An EY participant described some actions taken to date as “targeted relief to certain reporting deadlines, capital and liquidity rules, all of which are supposed to be reinforcing the actions central banks are taking to support the economy.”

Regulators and supervisors are also shifting resources to focus on risks that could crystallize in the current environment. Some have paused or reoriented their supervision to focus more resources on monitoring credit underwriting and operational risks. While some authorities are postponing stress testing, one regulator said, “We think transparency into the financial strength of the banking industry is important. So far, banks have been beneficiaries of some of the outflows from other industries.”

Challenges and opportunities in rapidly responding to lending needs

As banks accept their obligation to support government policies to ease financial pain, participants foresee operational and risk management challenges, as well as opportunities:

• Effectively implementing stimulus policies and assisting customers will require improved communication among banks and policymakers. An EY participant agreed with others that more clarity is needed on stimulus program requirements and the potential impact on banks. While some good policy intervention by government and regulators should be applauded, some participants said policymakers need to understand that conditions in the front line are difficult and banks will struggle to keep up with the pace of lending required. One participant commented that “having standardized requirements could be helpful, as they were during the last crisis.”

• Banks will struggle to quickly process loans. Bank systems are not typically designed to process the expected loan request volumes on an expedited basis. A director said that before the crisis “it took 14 days to get loans over a certain threshold approved – if you moved fast.” In the US, the technology that Small Business Administration (SBA) lenders have in place today is not built to handle this.

An EY participant suggested that banks could improve processing by adapting to the technology they have, bringing in new technologies or creating solutions quickly through vendors. However, all of these options present risk. Some participants have worked with regulators to adopt new processes, using bots to automate rapid loan approval and delivery, backed by a government guarantee, which eases the strain on credit underwriting.

• How banks respond could impair or enhance their reputations. Some directors see reputational risks in banks being the transmission mechanism for government policy and perhaps taking the blame if things go wrong. Others see an opportunity for banks to be viewed as part of the solution. One director said, “I see this as a fantastic opportunity to restore the faith of the public in financial institutions and it’s certainly up to each institution to stand up and deliver.”

3. An uncertain future will continue to test models

Participants anticipate that unprecedented levels of uncertainty in economic conditions and government policies will pose challenges for balance sheets and scenario planning for some time. The “new normal” could also raise longer-term strategic and operating questions.

Challenging risk models and assumptions

The immediate focus is on finding ways to support growth and ensure that customers and employees get through the crisis safely.

But the unprecedented economic shutdown is challenging risk management. While some participants say they are within their extreme stress scenarios, they acknowledge that a long-term shutdown of large parts of the economy would continue to test models. As one director said, “Unemployment figures are way past most high-risk scenarios. We’re now looking at whether some of our assumptions need to be reworked.”

A long tail to recovery

Some participants cautioned that this crisis could have a much longer tail than many initially predicted: “We are looking at a timescale of at least six months with the current measures in place,” said one. In such a scenario, recovery timing and trajectory becomes increasingly difficult to project.

Further, the economic rebound may be more gradual than the V-shaped recovery some initially hoped for. Consumer confidence needs to come back – though it may be a long time before it returns to previous levels. One participant noted that if businesses did not have three to six months of sales, they were not going to last. “Banks have no option but to help companies get through this period. But banks are heading for huge credit losses under any scenario.”

Another observed that “depending on how long this lasts, some of the businesses we’re asked to lend to will not be viable.” One participant predicted, “Debt for equity swaps will happen.” Ultimately, governments and central banks will likely end up as the backstop.

The longer economic shutdowns persist, the more the current crisis will also raise important questions for banks and directors about the future. How should banks think about the branch footprint going forward? What about blurring lines between centralized and localized contact support or retraining employees?