Fighting coronavirus and the growing challenges of the banking industry

Fighting coronavirus attack is much larger than handling the danger of the death threat. The extent of death tolls and the economic and financial losses are uncertain. While the outcome of the global efforts and the potential timeline for handling the situation are unclear, there are clear indications that the resulting economic devastation might even bring greater havoc. Economic activities are already severely disrupted in many countries, and others are getting ready for facing the disruption. Alongside fighting with the 'corona', global economies are also started preparing for the following economic recession and crisis. The economic turbulence would certainly be causing huge challenges for the banking and financial industry.  

Major stock markets are already in the news headlines with crashes, and there are no sign for quick recovery. There are collapses of business confidence both in developed and developing countries. May not be in the headlines like the stock exchanges, but banking sector started getting hits and might face even longer-term challenges. For example, Chinese banks slowly getting impacted from a rise in bad loans as a result of the outbreak of the coronavirus, as expected. Especially, small businesses are vulnerable to the environment. A rating agency's estimation came up with a volume of an additional US$800 billion in bad loans giving a rise in non-performing loan ratio of above 6.0 per cent in China. Chinese banking industry is getting increased pressure even though People's Bank of China (PBoC), the central bank of china, initiated huge liquidity injections into the financial system along-side interest rate cuts.

In line with the strategy followed during the last global banking crisis of 2006-08, the Federal Reserve of USA (Fed) cut interest rates and announced a US$500 billion increase in its holdings of treasuries and a US$200 billion increase to its mortgage-backed security portfolio. As a whole, the goal of the emergency move is to make it easier for banks to lend. In addition to that, the Fed lowered its primary credit rate to encourage banks to get fund from the 'discount window' to meet borrowing demands of the businesses and households. USA's big banks have already started drawing funds from discount windows of the Federal Reserve System for on-lending. Some large banks of USA also initiated measures to support the economy. For example, banks like JPMorgan, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, and some other banks temporarily suspended their share buybacks in order to use excess cash and significant capital and liquidity to provide maximum support to individuals, small businesses and the broader economy through lending and other important services.

In the similar fashion, the European Central Bank (ECB) announced EUR 750 billion coronavirus stimulus to address the extraordinary scenario. The European banking regulators softened capital and liquidity requirements for lenders so they could continue pumping credit. The European Central Bank decided to launch a temporary asset purchase programme to navigate the potential economic downturn. The European Central Bank is considering flexibility to adjust increased non-performing loans to bank-specific circumstances; and extending deadlines for certain non-critical supervisory measures and data requests.

INDUSTRY RESPONSES: The banking industry responses of the coronavirus outbreak might produce several industry responses. With the stock market fall, share of the banks have also been affected dramatically. Falling interest rates are likely to reduce savings rates that banks use to attract customers and drive deposits. More specifically, these rate cuts are likely to put pressure on banks that rely on saving accounts in order to support new businesses. In many instances, savers are withdrawing huge sum of their deposits in response to the fear of meeting coronavirus attack-related additional expenses. There is also fear of bank failures. This trend is creating additional pressure on the deposit-dependent banks. As the coronavirus scenario is affecting job holders, banks are expected to also face major difficulties with consumer and small- to medium-sized loans. Another visible impact is the greater digital banking usage, however, on the negative side, especially for fin-tech firms in the payments sector is going to face drop in transactions at all levels of the economy worldwide. The impact of the coronavirus outbreak is impacting both financial markets and consumer behaviour and at least in the short term; there would be a significant flight to safer investments by consumers, which could negatively impact venture capital funding of existing and new fintech firms.

BANGLADESH BANK RESPONSE: Bangladesh Bank has also been actively working to respond to the increasingly challenging circumstance. The central bank has recently asked the scheduled banks to suspend adverse classification of loans till June 30, 2020 to facilitate business activities in view of the coronavirus outbreak. The expected intervention is a move to support businesses and traders that are not able to repay their loans in time due to the exceptional development. In another circular, the central bank relaxed foreign exchange regulations for trade transactions and unveiled a number of policy support for the country's exporters and importers amid a slowdown in external trade in the wake of the coronavirus pandemic. The central bank offered extended time for realising export proceeds, submission of import bills of entry, back-to-back letter of credits and payment of export development fund loans, and repatriation of export bills at up to 10 per cent discount. The offered facilities of the Bangladesh Bank would be valid till September 30, 2020. The central bank is expected to come up with more responses with the changing circumstances and developments.       

Professor Shah Md. Ahsan Habib is  Director [Training], Bangladesh Institute of Bank Management (BIBM)

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