As cases of COVID-19 are rising and economic activity is grinding to a halt, governments are supplying all resources they can to limit the pandemic’s human and economic cost. Public initiatives entail economic stabilization funds, guarantees, loan facilities, grants or potentially equity contributions. Even with the announcement of extensive fiscal and monetary policy responses around the globe, it is unclear if the measures will become effective fast enough. A global recession seems unavoidable. In this market disruption – and contrary to the financial crisis of 2008 – the real economy now infects the financial sector.
Stress simulation and three economic scenarios
The development of the world economy heavily depends on the severity of the pandemic. To help European banks prepare for a potential financial storm, Strategy& conducted a COVID-19 stress simulation and created three possible economic scenarios based on different pandemic patterns:
It is now vital for financial institutions to be prepared for the months ahead. Despite the fiscal countermeasures announced by governments around the world, banks will need to closely monitor the effectiveness of those and whether country-specific risks will materialize on a global scale.
The management attention of banks is now shifting
For most banks, the initial response to the COVID-19 crisis included activating business continuity plans, whilst occasionally dealing with operational challenges regarding remote working capabilities or internal communications. Leading banks have screened their risk exposures (credit, market, counterparty or operational). The diagnosis: COVID-19 will infect banks at various levels, however, the majority of financial effects have yet to materialize. As the further development of the pandemic is still uncertain at this time, our analyses also unveil a mixed picture of European banks with regards to their expectations of the impact on loan loss provisioning as well as on CET1 ratios.
While financial resilience is on the minds of some executives, the focus of many institutions goes beyond the immediate financial harm of COVID-19. Managers are slowly shifting their attention to steering firms and their market activities through the pandemic. The goal for all of them is to transform the business for a post-COVID world and emerge from the crisis stronger than the competition.
In order to succeed, managers will have to consider the wider implications for the banking industry. How will the landscape change if the federal government suddenly becomes one of the largest risk takers in the wholesale lending market? Will the need for physical bank branches and cash change? How will foreign competitors react to the crisis and will they repeatedly focus on their home markets, as they did in 2008 and 2009? But also, who will be the winners and losers of this crisis? Is COVID-19 accelerating national or cross-border mergers within the banking sector?
Many of these questions cannot be answered today. However, firms must prepare for a volatile period, overcome its challenges and seize its opportunities. After all, market shares can easily be won – and lost – in times of crisis.
To help banks steer through uncertainty and prioritize their actions, PwC and Strategy& have set up the following three waves models:
Particular steps that managers should focus on in order to emerge as winner in the post COVID-19 world include:
Whatever the economic impact of COVID-19 on the financial sector may be, managers now have to shift their attention away from short-term measures and focus on the necessity and the opportunity to make strategic decisions in order to transform the business for a post-pandemic world.
Together with our CEO Agenda for European banks, the three waves model provides a blueprint to guide financial institutions through this volatile period. Over the coming days and weeks, we will publish further articles on Payments, Retail Banking, Corporate Banking, Asset Management, and more, outlining how the Financial sector can prepare for the challenges ahead, as well as seize potential opportunities.
Felix Becht, Thorben Wegner, Marius Klee and Stephan Plietsch have also contributed to this article.