Coronavirus - how will it affect the financial sector?
The COVID-19 pandemic causes major impact on people, communities and the world, leading to challenges that we have not faced before. The COVID-19 pandemic will undoubtably also have a major negative impact on the global economy and its’ capital markets.
The uncertainties surrounding the COVID-19 pandemic combined with various governments’ different responses to meet the challenges means that we are facing an unprecedented situation with no estimated end date. These uncertainties make day-to-day planning as well as mid and long-term planning crucial for all businesses to continue delivering value to customers and society as a whole.
For the past 12 years, FCG has supported the financial sector with expertise in contingency planning, risk and capital management as well as liquidity planning.
We at FCG are fully committed to continue supporting our clients and have assembled a team of experts that are available in these difficult times. If you have any questions or need assistance, do not hesitate to reach out to your regular FCG contact or our Special task force team.
Government support for the Financial Sector
The long-term effects on the economy are difficult to predict, but the immediate effects are already evident. Many governments are launching stimulus packages with the aim of keeping the economy afloat. To avoid a possible shortage in credit supply, Sweden’s central bank is offering banks the possibility to borrow unlimited amounts on a weekly basis at lowered interest rates. The central bank has also pledged a SEK 300 Billion increase for the purchase of securities. Jointly, these measures will provide additional liquidity to the financial system and hopefully curb the negative downturn.
The European Banking Authority has issued a statement urging the competent authorities to make full use of the flexibility embedded in existing regulation, and in Sweden, the financial supervisory authority has adhered to the call by lowering the countercyclical buffer rate.
The financial industry act as a pillar for the overall economy and when faced with this extraordinary situation it is essential that financial institutions and the capital market continue to operate and function with as little disturbance as possible. Therefore, FCG’s view is that it’s very likely that more stimulus packages are needed and will come, both as government provided liquidity and as prolonged timelines for regulatory implementations.
FCG is continuously working to support our clients in addressing the COVID-19 challenges, the main conclusions from that work and from previous crisis planning and support are listed below.
Crisis planning – short, mid and long-term
In a crisis, it is crucial to restructure the company’s planning based on the new factors that have derived from the events that are taking place affecting the company. The planning needs to range from day-to-day to month, quarter and year. The COVID-19 pandemic factors are very volatile to predict and affect all areas in a financial company, however short-term effects are starting to become predictable. Having a structured plan with clear mandates to take quick and informed decisions is a key in a crisis like the COVID-19 pandemic. Below, FCG highlights the main areas that in our view needs to be addressed:
Liquidity and capital planning
A company’s liquidity risk originates from both sides of the balance sheet, liquidity comes as a result of liability. Therefore, a comprehensive understanding on how the current situation effects both assets and liabilities is crucial to get the right assessment of the company’s liquidity risk in order to establish optimal strategies to handle the risk. As the financial market liquidity is constrained, and current conditions significantly differ from normal, a company´s funding composition needs to be mapped towards the actual market liquidity, and alternative strategies needs to be considered.
The internal liquidity reporting and stressed scenario analysis also need to be increased, to cater for accurate decisions.
FCG also see that most financial companies need to update their capital planning, taking into consideration new economic outlooks and portfolio development, including the impact from future NPL:s.
Credit and Credit Risk
Many individuals and companies are facing financial distress due to layoffs, supply chain disruptions and a decrease in the overall demand. In a situation such as this, it’s vital that banks and other creditors continue to support the society while maintaining robust and prudent approaches to credit risk, management and monitoring. Various initiatives to support the society are being taken by the banks such as reducing or suspending amortization payments for households with decreased incomes as a result of COVID-19. The unknown long-term macro factors as well as the short-term factors will have to be addressed in:
- ensuring a robust credit process
- credit risk models
- increased management reporting
- increased follow up on defaulting credits/portfolios
- increased and detailed management reporting
Market Risk
The COVID-19 pandemic has caused an unprecedented volatility in all asset classes combined with drastic decrease in liquidity. This fact needs to be addressed by financial companies both short term and long term - FCG would like to highlight the following areas:
- recalibrations of market risk models
- new hedging strategies
- second opinion valuation of assets
- internal reporting
Business continuity
Many companies have now applied their crisis management plans to ensure operational continuity through the crisis. This can lead to additional operational risk exposures due to reverting to crisis processes and routines instead of utilizing the company’s ordinary processes and add additional cyber security risks as people are working remote from home outside of the company’s ordinary protective measures. Further, the companies' dependencies regarding IT-services from suppliers are at risk as the service provider are as well exposed to the COVID-19 virus as the companies themselves. FCG would like to highlight the following areas:
- Additional information security measures and control, as we have already seen tailored cyber security attacks that uses the COVID-19 as a pretext for the attack
- Risk assessments and internal controls to ensure adequate control over temporary processes that are used during the crisis
- Ensuring adequate proficiency and security from IT-service providers to ensure services delivery
- Adequate people processes to ensure; support for employees, manage communication expectations, resilience in personnel
- Ensure that the incident management processes are operational and managed
- Ensure sustained business continuity arrangements as the crisis could carry on for weeks
