Financial Impact of COVID-19 on Global Banks
Introduction
COVID-19 has affected the global banking industry negatively as many and businesses have encountered slow sales, reduction in profits and job losses to borrowers. The financial sector has been heavily impacted by the measures instituted to curb the pandemic spread. In the banking sector, personal contacts between banking advisors and clients have been nullified. In other organizations, almost entire functions are working from their places of residence, thus instituting administrative challenges. As the virus continues to spread and cause havoc, banking clients may begin seeking financial aid with Federal regulators in the United States directing banks to offer relief. Apart from addressing the economic impacts of the pandemic, the institutions need to implements plans directed at protecting workers and employees. Some banks have begun encouraging employees to work from their places of residence. Clients are also being encouraged to avoid spending much of their time in crowded areas and should minimize physical interaction when banking. By initiating digital client transaction systems, banks can ensure their daily operations are initiated with minimal disruptions. The assignment will focus on the financial challenges global banks are currently encountering due to COVID-19. It also incorporates strategies adopted by banks in coping and adapting to the global crisis.
Financial impacts on Global Banks
Some of the renowned global banks include Barclays, Bank of America Merrill Lynch, BNP Paribas, HSBC Bank USA and Citigroup. Some of the financial impacts encountered by global banks include;
Limited circulation of banknotes
As the coronavirus continues to spread, banks have been continuously seeking alternatives to physical exchanges and in-person transactions. The World Health Organization (WHO) directed that persons utilize “contactless payment systems” and refrain from using banknotes. This is because COVID-19 stays alive on notes for several days before dying and therefore, continuous use of banknotes in transactions could proliferate the spread causing countless infections (Melamedov, 2020). As a result, the Bank of Korea started withholding notes from the local banks for two weeks. The Government of China also took a step of requesting banks to disinfect all banknotes before lending to the locals.
The United States Federal Reserve took the initiative of separating and isolating all banknotes originating from the East for a period of one to two weeks. As a result, in many markets, money circulation has been constrained. Withdrawal processes have thus been impacted. Some customers have to wait for some days before withdrawing limited the efficiency earlier realized before the virus.
Subsidiary Closure
Some of the global banks have been forced to close down some of their branches as a step to supplement social distancing (Foreman, 2020). This has been highly featured in the United States where the banking system is working on modifying their servicing through digital platforms. According to S&P Global Market Intelligence, Banks in the United States closed 157 subsidiaries and opened up only 17. It is worth noting that S&P data does not incorporate “temporary bank closures.” As of 2019, a total of 2,733 bank subsidiaries had closed down while 1,202 opened up (S&P Global, 2020). Other closures relative to the pandemic included Evansville; ten in Indiana and eleven in Wisconsin, and the Bank of Montreal in Canada which closed about twenty-six subsidiaries in the United States with fourteen being from Wisconsin.
(S&P Global, 2020)
(S&P Global, 2020)
With subsidiary closure, banks which have not yet fully adopted digital systems for the transaction have encountered financial drawbacks. This is highly linked to the drop in deposits, withdrawals and money lending, which were higher before closure.
Fall in shares
Banks which have invested in the gas and oil sectors have encountered losses due to stock underperformance associated with oil price plunging (S&P Global, 2020). The oil and gas sector is not expected to recover much soon as power consumption has adversely gone down. Reduced power consumption has been mainly attributable to the massive lockdowns and advocacy for the adoption of renewable energy (S&P Global, 2020). According to S&P Global Ratings, oil companies are expected to encounter difficulties tapping into the capital markets or alluring acquirer’s away from bankruptcy. The current down-cycle cannot be compared to the traditional bank “redetermination” seasons. Drops in investments reflect a decline in overall performance for Global banks.
Banks’ response about their credit, liquidity and funding risks
Amid the global crisis impacting the banking sector, some of the banks have discovered loopholes towards redressing the risks presented by the pandemic. Some of the strategies adopted include;
Virtual banking
Rates of venture capital garnered by financial technology corporations in the Asian-Pacific sector went down to $1.3 billion, that is, 58.5% at the beginning of 2020. The most significant proportion of the funds collected went to companies based in India (S&P Global, 2020). According to S&P Global Market Intelligence, in industrial segments, payment corporations pioneered in regards to total funds raised and the degree of investments. The high interest in challenger banks created optimism for the virtual and digital banking contenders.
Fintech’s based in India collected approximately $543.4 million in the first quarter, that is, 42.9% from the Asia-Pacific region (S&P Global, 2020). Despite Indian Fintech realizing the most significant funding in the previous quarter, the drop was attributable to the lack of “mega funding rounds.” One97 Communications Ltd in December 2019 through two fundraisings pooled $1.7 billion. Without considering the injection, fintech’s in India in the first quarter would have realized a growth of 17.9% (S&P Global, 2020). In March, India seized accepting investments from its neighbours to inhibit “opportunistic takeovers” of the Indian fintech and other corporations. It is worth noting that such investments are now being subjected to government clearance which may likely instigate new cash inflows (S&P Global, 2020). With China regaining control over COVID-19, fintech funding seems to be gathering speed in raising capital.
(S&P Global, 2020)
Government security
The “too big to fail” concept serves as a haven for many banks, especially in the European economy. Through the concept, the organizations believe that amid disastrous or situations of emergency, they will be saved due to their large size and operational significance to the economy. With the current coronavirus situation, most of the global banks have closed down their branches with some encountering huge losses attributable to share underperformance (Sheffield University Management School, 2020). The EU outlined that where a bank is struggling, it will cease lending for about five days and work to redress the impact of encountering further failure. Too big to Fail (TBTF) directives made it paramount to go for regulatory solutions which would limit to scale of the financial crisis. The solutions are based on the high capital requirements, resolution and recovery of credit institutions, regulation of hedge funds and derivatives as well as the institution of structural reforms. This has secured banks from achieving low capital reserves and secured them from bankruptcy. However, the institutions have not come out the dark yet as the pandemic continues to rage havoc in other industries.
Conclusion
Since Coronavirus erupted, it has negatively impacted numerous sectors of the world economy, including global banking. A significant proportion of global banks have been forced to abandon their traditional banking approaches and adopt digital systems to serve their clients. Some of the challenges banks have encountered limited money circulation impacting client servicing, subsidiary closure where they have been forced to close down some of their branches and a fall in shares, thus limiting their performance. In regards to closure, a total of 2,733 bank subsidiaries had closed down while 1,202 opened up by 2019 in the United States. Other closures relative to the pandemic included Evansville; ten in Indiana and eleven in Wisconsin, and the Bank of Montreal in Canada which closed about twenty-six subsidiaries in the United States with fourteen being from Wisconsin. In limiting banknotes, Bank of Korea withheld banknotes from the local banks for two weeks. The Government of China also requested banks to sanitize all banknotes before advancing to the public. The United States Federal Reserve was not left behind as it took the initiative of isolating all notes originating from the East for a period of one to two weeks.
Share underperformance in the global energy sector has also instituted operational challenges. The oil and gas sector is not anticipated to recover soon as power consumption has dramatically reduced. Low power consumption has been mainly attributable to the lockdowns in significant towns and cities and the advocacy for the adoption of renewable energy. However, banks have strategized on redressing the challenges encountered by adopting virtual banking and government regulation. The first quarter of 2020 was featured by increased funding in the fintech domain primarily for the Indian corporations. This domain is highly secure guarding against liquidity risks. Through the “too big to fail concept,” the governments institute a directive for struggling banks, advising them to cease lending for about five days and work to redress failure. This ensures they have ample assets to sustain operations. Sustaining such approaches will aid the banks to stay afloat during this pandemic season.
References
Foreman, D. (2020, May 26). Banking and cash during COVID-19 crisis: Some branches close, yet ATM fees may be waived. Retrieved from https://www.forbes.com/sites/advisor/2020/03/19/banking-and-cash-during-covid-19-crisis-some-branches-close-atm-fees-may-be-waived/#544690511c6d
Melamedov, L. (2020). Coronavirus (COVID-19) and the banking industry: Impact and solutions. Retrieved from https://www.lightico.com/blog/coronavirus-covid-19-and-the-banking-industry-impact-and-solutions/
Pofeldt, E. (2017, December 5). Best global banks. Retrieved from https://www.globaltrademag.com/best-global-banks/
S&P Global. (2020). Shuttered for COVID-19, some US banks consider closing branches for good. Retrieved from https://www.spglobal.com/marketintelligence/en/news-insights/blog/amid-q1-apac-fintech-funding-slump-payment-companies-drove-investments
Sheffield University Management School. (2020). The challenge of challenger banks; Lecture 6 [PDF document].