A resilient banking industry will drive global recovery
The global medical crisis has become a financial one too, and all sources now point towards a global downturn. Independent analysis suggests global growth in 2020 is expected to fall within a range of -0.5% and -1.5% – although the anticipated impact to individual economies may be higher.
Driven by significantly reduced consumer demand for a range of goods, it’s not hard to imagine that many industries, including banking, will suffer as discretionary spending collapses. If people are struggling to cover the cost of essential items, the probability that they will purchase loans to finance luxury goods is low. In the face of reduced lending volumes from consumers and businesses and increased risk levels, how can the banking industry ensure it’s resilient to such a drastic change from its customer base?
Regulations fuel resistance
There are two factors that will help recovery. The first actually lies with the 2008 financial crash. While it led to significant long and short-term losses for many around the world, it also instilled, and in many cases enshrined in law, a minimum level of resilience for the industry. The Internal Ratings-Based (IRB) requirements and the International Financial Reporting Standard (IFRS) 9 for example, create an ongoing and solid basis of regulation that financial institutions need to adhere to. These frameworks aim to help the banking sector remain resilient even after the worst of the health crisis abates.
However, while regulations will ensure a minimum level of continuity and consistency in financial services, regulators must also take steps to help the industry now and in the future. It’s therefore promising to see steps are already being taken, such as the delay to the 2020 EU-wide stress test to next year and the confirmation from the ECB that banks can operate with less capital than usual to help them get back to a state strong liquidity. Flexibility will be key over the coming months and years both from the industry and regulators to ensure they can protect themselves and their customers.
Technology improves decision-making
The second factor that can support the industry is technology. Defaults on loans and the levels of bad debt is expected to rise in line with less capital available to businesses and consumers. It’s therefore vital that banks take steps to manage their portfolios actively and responsibly to ensure they’re providing customers with the right products for their needs and, just as importantly, they’re affordable. Data and analytics can play a strong role in enabling this to happen.
Accessing capital during a downturn is difficult for businesses and consumers. Banks need to demonstrate that they’re responsible lenders that can support their customers in this time of need. By using forecasting and modelling tools that incorporate first and third-party data, banks can get a clear understanding of a customer’s current and potential future situation. Using that insight, they can then make a clear judgement on how best they can support the customer with the most suitable product. Simply selling loans during this period without strong insight can harm the customer and lead to defaults that will damage the bank, making less resilient. Data can and will help the industry to manage the situation more effectively, avoid unnecessary risk in what is already expected to be an incredibly difficult environment.
Technology can also support process improvements. Operational efficiencies, cost savings and automation will be key over the coming months and years. This will be driven by physical office closures, staff absence and higher than normal resource demands, coupled with the expected extensive time period that social distancing guidelines may be in place for. For example, Analytics teams will come under increased pressure to perform, while many still have to work remotely, as they key to monitoring and managing the impacts of a downturn. To help them, and other divisions, banks need to review and invest in strategies to automate and outsource operations where possible to help teams focus maintaining liquidity and supporting customers.
Adaptation creates opportunities
The financial sector should not be in any doubt that the future is likely to be highly disrupted. However, there will also be opportunities to growth too. Many governments are actively supporting SMEs across EMEA, and the expectations is that this customer group may become highly valuable. Through the use of AI practices to evaluate credit applications, banks can gain valuable insight into those with high growth potential and would therefore be valuable to invest in and support.
As the health emergency subsides and the world moves into a global financial crisis, institutions need to take steps to protect themselves and support their customers. The banking industry is relatively well-placed to weather the coming storm, but it cannot be complacent. It needs to use the learnings gained from existing regulations to secure itself. Analytics will also be a powerful tool for the industry internally and externally, enabling it to responsibly lend, identify opportunities to grow, and support in other industries to aid recovery worldwide.
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