How banks can adapt as more small businesses and consumers are relying on economic support from the COVID-19 pandemic
Over the last few months, the COVID-19 pandemic has affected every industry and just about every individual. Social distancing guidelines and shelter-in-place restrictions have made it difficult for consumers to go about their daily business (whether work or recreational), which in turn has left businesses without the transactions and exchanges needed to stay profitable.
Financial institutions, though holding the money bag for businesses and consumers all over the world, have also been affected by the pandemic. In addition to restructuring how personnel interact with consumers and adapting to increased digital traffic, these institutions need to get a grip on the issues that are going to define their future. The changes in consumer behaviors and market forces will forever change the face of banking.
Reconsider Balance Sheet Challenges
With so many people suffering layoffs or reduced working hours, the government has encouraged banks to offer loan relief programs in order to ease the burden on the American citizen. Loan stress isn’t just a problem here within the U.S. though, as countries all over the world have had to contend with shutdowns and pandemic concerns. Whether it is a financial institution like the Guyana Bank for Trade and Industry operating overseas or a local community bank, many institutions will see intense pressure on their liquidity buffers over the next few weeks and months. This will deeply impact how lenders will assess extensions or renewals with credit lines. Any decision made will impact the consumer, which will have a ripple effect on an already struggling economy.
The OCC has suggested the banks stay close to the minimums on capital and liquidity buffers, not falling below the minimums unless a coordinated response has been established for a severe need. The Federal government is issuing new tools for banks to manage the crisis, but in some cases, these are making it more difficult to recalibrate during the day and address the fluctuations in liquidity. As the slowdown drags on, financial lenders could see a major influx in small businesses trying to get additional financing or a new loan. In addition to the challenge of assessing risk, banks may deal with a shortage of employees in certain locations. Allocating resources to address these needs will become another layer of stress.
There are a few steps a bank could take to minimize risk and stress.
- As clients continue to make decisions that reduce risk in their own portfolios and increase their cash positions, there may be an increased draw on credit lines. Carefully monitor the deposit fluctuations on your balance sheets.
- Consider the impact of the stimulus funds to consumers and evaluate lending opportunities against these changes. Client refinancing deals should be weighed against your balance sheet strategy, but stimulus funds could create new lending opportunities or change profitability evaluations.
- Maintain close contact with accounting and credit risk teams to determine and monitor how the expected increase in losses will impact earnings.
- Take steps to refinance existing debt or offer attractive rates in lending to raise new funding.
- Reconsider and restructure any planned capital actions, thinking through the forecasts on new balance sheets and the changes in dividends or buyback strategies.
Quickly Trim Your Costs
While you work on ways to reduce your losses on the consumer end of operations, you need to minimize your spending on any activities that aren’t activity building up your core capabilities. With the instability of the current situation, it is more important than ever to stop the bleeding at the expense level.
Companies across the nation are taking the position of hiring freezes or layoffs in a “quick hit” response to curb costs. Even though effective, there are other ways to rapidly trim your operating costs. At the corporate level, make a thorough review of all recent proposals and inflight projects. Have a control tower process assess the costs that can either be trimmed or eliminated completely. The same process should all review all new costs to keep the “must-haves” separate from the “nice to have.” This could be done in as little as two weeks.
The next step is to look at the physical locations and equipment or items in them. If possible, shit down buildings or campuses to allow employees to work remotely. Reduce heating and cooling demand and other utilities as able. Move processes to digital operations, as a software implementation of accounting or marketing features could be easily accomplished or outsources to a third party. Customer service needs could be streamlined to digital response measures in order to reduce the demand for live resolution.
There is still uncertainty in the future for the national and global economies, and financial institutions need to have their strategy firmly in place to address the ups and downs of the changes. Any changes that have been made over the last few weeks and coming months should have some staying power, in order to maximize resources and efficiency going forward. Consumers and the industry will have different expectations once the dust settles, which banks should be prepared to offer.
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