2021-03-08 09:57

What Has The Financial World Learned From The Pandemic Era?

Amid the chilling consequences of the COVID-19 on health and society writ large, the pandemic has had tremendous effects on the financial industry and businesses worldwide. The health emergency forced the financial sector to rush to include new factors into its analysis of loans, securities, and portfolios—from the virus' transmission rate in specific markets to the periodic enforcement and easing of lockdowns.

The speed with which COVID-19 disrupted the normal financial business flow means that firms are still coming to terms and learning to adapt to these new, powerful market forces. Partway through this pandemic, it's essential to take stock of the lessons learned over the past year to make the best possible decisions in 2021.

Of course, the financial industry is not unique in facing these challenges since so much can be learned by looking at successes in other sectors. Simultaneously, the constitutive role of risk in the financial world creates unique challenges in that business space.

Best/Worst Case Scenarios

Financial workers are used to being quick on their feet to respond to crises, judging the impact of everything from geopolitics to the weather on stock prices. These skills are being tested to the maximum by a crisis affecting the whole world at once.

The truth is that one cannot specify best and worst-case scenarios with any degree of precision. The best case is that vaccine rollout is quick and things are back to normal by next year. And the worst is the pandemic carries on, and the world enters a deep recession or even depression.

Within these unique economic conditions, firms have to remain concentrated on whether the market represents the present economic conditions. Some have begun to wonder whether the market is correctly tracking those conditions.

Without any precedents or received wisdom, the financial world will have to trust its gut and be ready to change its mind throughout the pandemic. That doesn't look to change anytime soon.

Lesson 1: The Importance Of Government Support

Other than the virus itself, there's little that's affected the financial industry more than governments' economic policies in response to it. There's a lot of variability in how governments have reacted. Governments vary in both the assistance they offer to the financial industry specifically and to everyday consumers.

By looking at these policies' successes and failures, financial institutions can have stronger predictions of what will happen if governments release further in their country.

United States

From the beginning of the COVID-19 pandemic, American policymakers focused on ensuring the banking sector's stability. The Federal Reserve has actively provided funds to banks to help them maintain an adequate level of capital resilience. This has helped ease the impact of loan defaults and other losses on the financial system.

Scandinavian Economies

The substantial health of banks in Sweden, Norway, and Finland leading into the crisis was helpful in addressing the crises brought on by COVID-19. The already high capital requirements within which banks in the region operate provided a useful buffer for the losses faced during 2020.

Nonetheless, governments in the region still provided assistance to the financial sector. The Swedish government, for example, stepped in with the "State Loan Credit Guarantee" to take the majority of the risk for new loans to companies that were affected by COVID-19. This freed up banks to make loans to struggling businesses that they wouldn't otherwise have been able to justify.

Lithuania

Although banks in Lithuania faced tougher conditions than some of their northern European neighbors during 2020, their financial health was sufficient to see them through the crisis so far.

Government assistance was, as elsewhere, crucial to that outcome. One influential policy was the loosening of certain regulations that allowed banks to lend more, allowing banks to function with a lower liquidity coverage ratio (LCR).

Lesson 2: Look To Other Industries

Many businesses had to drastically rearrange their operations in response to the pandemic, sometimes in days or weeks, or risk going out of business. The financial industry can learn from both smaller and larger businesses and make changes based on those lessons in the year ahead.

Small Scale Businesses

The small scale of these businesses often allows them to take more risks in trying out new and innovative ideas. The costs of failure would not be so high as at a global corporation or big bank. From using live streams to interact with customers in an entertaining way to moving training sessions online, the creative responses to the restrictions introduced during the pandemic often came from this sector.

Many larger businesses in the financial sector can make better decisions by watching what works and what doesn't in smaller firms.

Larger Industries

The financial industry can learn lessons related to the things they have in common with other large businesses, regardless of their industry. Different ways of managing a large workforce through restrictions and tactics for providing health and wellness support are both challenges that affect all large operations, so it's instructive to watch how other companies respond to them.

Lesson 3: Different areas of the financial sector face different challenges

The effect of COVID-19 hasn't been uniform across all areas of the financial world. The same change in the epidemiological situation can have different effects on different divisions in the same company.

Securities Market

As a result of conditions tied to government loans and assistance, financial institutions have had to reduce their securities portfolios' risk profiles. These compromises helped to protect balance sheets but have reduced the high profits that securities can bring.

Credit Management

The global economic downturn in the first half of 2020 had a massive effect on the loan ecosystem, as both businesses and consumers struggled to meet their debt commitments.

First off, the crisis has pushed central banks to keep interest rates low. The European Central Bank has not only kept interest rates at 0% but also introduced a negative 0.5% rate on deposits. These steps have reduced the profitability of loan operations.

Furthermore, the default rate on loans has risen, with some European banks losing money as a result.

Lastly, there's been less demand for consumer loans in many places, like Lithuania, giving banks less opportunity to make up lost ground.

Customer Relations

Nearly every business in the world made some form of the shift towards online communication as a replacement for in-person interaction with their customers. Two challenges needed overcoming:

(1) making sure the replacement systems ran smoothly and could cope with demand and

(2) making up for the lost personal touch that goes with face-to-face interaction.

Different industries, and different businesses with the financial sector, are dealing with these challenges differently. Some are doing better and some worse, but all have improved their ability to make quick and decisive changes in this area of their business.