8 minute read 2 Jun 2020
Woman standing on mountain top looking out at city

Four concerns as banks adapt to a COVID-19 future

By Tapestry Networks

Professional services firm

Tapestry Networks creates an environment where leaders learn from one another, explore new ideas, and collaborate to solve problems.

8 minute read 2 Jun 2020

As uncertainty gradually lifts, global financial leaders explore how to adapt and make longer-term strategic and operating decisions.

With the COVID-10 pandemic still top of mind, Tapestry Networks convened the Bank Governance Leadership Network (BGLN), including EY Global Financial Services leadership, bank non-executive directors, regulators and other executive leaders for two virtual meetings on 29 April and 1 May to discuss the global response and implications for large banks. Discussions focused on these key themes:

  • Banks must move fast on credit issues and government-backed loans
  • Monitoring and managing risk is being challenged by uncertainty
  • Operational risk and technical resilience are under greater scrutiny
  • Remote working is testing management styles and operations

1. Banks must move fast on credit issues and government-backed loans

Keeping economies and customers afloat could have wide-reaching implications.

Tension exists between moving to extend financial support to customers impacted by the crisis and ensuring the proper controls, risk management and ethical lending practices are in place. Actions taken by banks today to keep customers and economies afloat could have wide-ranging future implications; yet, high levels of uncertainty make these difficult to predict.

Conduct concerns and the potential regulatory response

Several participants raised questions about maintaining strong lending practices and related conduct issues as banks extend credit under government loan programs. 

Banks have to act very quickly, redesign processes, and quickly implement new processes to carry out government schemes. But due to the speed with which banks have had to do this, when there are retrospective reviews of this activity, how will banks be judged?
EY partner

Bank support for clients during this crisis has taken many forms, such as easing policies for overdraft fees, collections on negative balances and deferments, and offering smaller installment loans for small and medium enterprises (SMEs). While helpful now, these practices could have ramifications for the longer-term financial well-being of their clients, potentially burdening them with unsustainable levels of debt.

Participants expressed concern about how regulators might respond in the future, noting the potential for fragmentation among regulators and governments as they introduce different schemes, with varying perspectives.

What inevitable future credit losses will mean for banks

If the global economy falls into an extended, deep recession, it could trigger a massive increase in debt defaults. Many of the largest global banks have prepared by setting aside billions in loan loss provisions. 

Many companies that borrow may not be able to pay back those loans over due course. We run the risk that we’re just postponing their day of reckoning and creating a major problem in dealing with large volumes of resolutions and insolvencies that may come further down the line.
Bank director

Participants also expect a host of issues emerging under government-backed loan programs. While most are guaranteed by governments, it is not clear how the repayment process, and ultimately restructuring process, may work and whether the inevitable losses will end up on bank or government balance sheets.

Others questioned who will be held responsible for fraud. And, as loans go bad and banks ramp up collections, they may open themselves up to new risks.

Nividic lighthouse pounded by waves from Storm Ruzica Ouessant France

2. Monitoring and managing risk is being challenged by uncertainty

Management needs to rely on stress scenarios to understand potential risk exposures.

Board oversight of risks in the current environment is being challenged by unknowns outside the control of banks. Management is adapting existing tools and reporting mechanisms to provide a picture of banks’ exposures to different kinds of risks and other complex underlying situations.

Risk modeling and scenario planning are being challenged

Predicting the performance of a business or portfolio of assets in the current environment is extremely difficult given the wide range of unknowns for COVID-19, and policy responses to public health and the economy. Despite these challenges, participants noted how useful stress scenarios can be for illustrating and understanding potential risk exposures.

As one director explained, “There are a huge number of assumptions that go into our models and we won’t get them all right, but modeling can give you a sense of how various scenarios could play out and how your exposure would look. It just generates more conversation.”  

Boards are monitoring risk limit breaches

Questions were raised about how boards should react when some risk limits are breached. One director asserted that there are important distinctions between the application of limits in a business-as-usual environment and a crisis. These are conversations that raise interesting points for boards to consider. Ongoing communication with supervisors is also critical for managing concerns and ensuring proper steps are being taken.

“We are maintaining a very candid dialogue with the supervisor so that there are no surprises on either side,” one director said. “We are keeping them apprised of management discussions, as well as those at the board level.”

3. Operational risk and technical resilience are under greater scrutiny

New opportunities exist to accelerate digitization, automation and cybersecurity practices.

Around the globe, bank leaders have been surprised by the strong business continuity, despite disruption from the pandemic and massive migration to remote working. However, some highlighted emerging operational risks in the current operating environment:

  • Ensuring technical resilience and cybersecurity with remote workforces. Participants noted that the rapid response to ensure remote working would be safe and effective in the short term also meant delaying some initiatives, such as software patching or larger technology implementations.
  • Assessing third-party providers takes on new urgency. Banks have increasingly turned to third parties for a variety of services, putting the resilience of those providers under greater scrutiny, especially those where a significant concentration of financial institutions relies on the same provider. One regulator said, “We have seen a few quite significant third-party providers hit by significant cyber events already. That’s a pattern we’re seeing across the globe.” These concerns are causing some institutions to rethink third-party relationships altogether, particularly with smaller, less mature or off-shore providers.
  • Weighing the opportunities and risks to accelerated digitization and automation. Banks are looking to increase digitization efforts and adopt more automation and robotics to speed up processes, enable a remote workforce, and improve digital access for customers. 

4. Remote working is testing management styles and operations

The concept of management will change as the workforce makes wellness a greater priority.                

Participants discussed key organizational challenges and concerns that have emerged as the impact of the pandemic continues to unfold.

Enhanced focus on wellness

Wellness has risen on board agendas as workforces grapple with the ongoing adjustments to their professional and personal lives. As one director said, “Every board call I’ve had since this began has had wellness as one of the first topics of conversation.” Employee wellness is also linked to operational resilience; as one participant noted, “The more burned out your people are, the more operational risk you might see.”

Some participants said their institutions have been regularly surveying employees to get feedback, monitor wellness, and promote transparency. One participant cautioned that the employees perhaps most at risk are not the ones working remotely in isolation, but rather those individuals working on the front lines and in branches.

Proactive management and preservation of company culture

Bank leaders are reconsidering management styles and the maintenance of culture in the short term and increasingly, the longer term, as remote working continues.

“I’m intrigued by the prospect of how we need to change the concept of management in a remote working world,” one director noted. “One of our lessons learned already has been around the need for more communication.”

Participants agree on the need for more proactive management, and as time goes on, erosion of culture may become a growing concern. A director explained that things have worked out well so far because banks had relationships prior to the crisis. “We still need ways and mechanisms in place to ensure that going forward, relationships are still being formed and reinforced. This is not only true for our workforce, but also relationships with customers and the trust that is established in those relationships by having interpersonal knowledge and interactions with one another.”

businesswoman using laptop at table while working in home office

5. Looking ahead: considerations for operations and the workforce

Responding to changing customer behaviors will require greater agility and flexibility.

Management is learning from recent experiences as entire firms have transitioned to remote work. Participants identified a number of considerations, such as illustrating banks’ ability to be more agile than in the past; highlighting areas where banks could improve staffing to allow for more flexible allocation of resources; looking for broader changes to structures and resource allocation; and reducing physical footprints.

I’ve been thinking more about the talent supply chain. Banks are going to have to think harder about having employees who can perform multiple roles.

The lasting impact of the current environment will shape customer behaviors in new ways, and banks will have to adapt. Early insights from EY’s Future Consumer Index, shared on these calls by Jan Bellens, EY’s Global Banking & Capital Markets Leader, suggest some assumptions, regarding an accelerated and sustained move to digital channels, could be challenged as customer preferences continue to shift. While many predict a shakeout among newer FinTech entrants and challenger banks, some of these competitors are winning new customers with their ability to rapidly approve and provide loans. As one participant observed, “We’re definitely seeing winners on the digital bank side.”

For more details, download the full report (pdf).

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The COVID-19 crisis has changed the way banks view their operations, workforce and customer relationships. Global financial leaders share their perspectives on key credit, lending and regulatory issues and the implications around operational and technical resilience.

About this article

By Tapestry Networks

Professional services firm

Tapestry Networks creates an environment where leaders learn from one another, explore new ideas, and collaborate to solve problems.