THIS reflection sets out some interests for debate on the reaction of financial sector overseers to the coronavirus pandemic threat and mounting concern of the new United Kingdom, South Africa and Brazil variant covid-19, considered to be more transmissible than the previous one whose impact on the economy could be disastrous.
To-date, much of the bearing of the coronavirus has thus far been straightforwardly on the real economy rather than through the financial system facing various nations.
This impact in my view has varied extensively by country and region, but it has been typified by a declining in demand for many goods and services, a supply side shock through the closure of productive capacity and sales channels, and supply chain hitches, capital flight and travel restrictions, increased uncertainty and anxiety about the economic stance, falling commodity prices and official sector policy responses current or prospective to fund additional well-being spending and other response measures.
Considering at consequence, these impacts may be transitory, but they will not in my view automatically be withdrawn or unwound rapidly and there is likely to be a long-term negative impact on the real economy. What many don’t realise is that coronavirus and its impact on the real economy also affect the financial sector.
Meaning, when scrutinised analytically, involve sharp falls and greater volatility in equity and other asset prices while at some time lowering government bond yields and increases spreads for corporate borrowers. Another impact includes a tightening in market liquidity, deterioration in many borrowers’ creditworthiness and increased risk of investor withdrawals from open-ended funds, and of fire sales of assets.
In the longer-term, these effects in my view could undesirably affect the solvency and liquidity of some financial institutions particularly development financial institutions that are more in creating impact and intended to make profit like commercial banks. Ultimate outcome could lead to increased risks of adverse confidence effects on financial institutions believed to be in a weaker position, or from general uncertainty.
A negative bearing on the financial sector, in my opinion can feed back onto the wider economy and potentially lead to downward spirals. In this context, borrowers and other users of financial services will face a higher cost of capital, a higher cost, a higher interest rate and abridged availability of financial services more largely and more importantly an unwillingness or inability of financial institutions to finance the impact of shocks and to support borrowers and other users of financial services back to a degree of normality.
While is agreed that certain countries have built-in an easing of monetary policy; higher government spending on critical sectors such as health amenities and to provide an economic stimulus and some sort of financial stability policies as the reduction or removal of macro-prudential capital buffers and other counter-cyclical measures in an endeavour to sustain the flow of credit to the economy, a tricky issue remains, for how long can these measures be sustained? Or putting it differently, what sort of mission that lie ahead of financial institutions managing directors especially policy ones? While it could be reasoned that managing directors, conferred powers by appointing authority to oversee such institutions, need to keep calm and carry on and plan strategically, in my view a smart leader, instead of just reacting, should monitor economic and market developments.
They need to take time to screen the creditworthiness and liquidity of own individual financial institutions, taking into account the impact of coronavirus on the creditworthiness of borrowers and the value and unpredictability of traded assets to help them intervene to ensure that financial institutions are taking a sensible approach to assessments, provisioning and write-downs, and monitor wholesale credit market behaviour for any signs of the ill-use of customers or market misuse.
Critical issues for banking, insurance, pensions and securities’ directors in my opinion also need to address some more difficult matters? In this aspect, there may be some tough verdict calls to be made here as financial institutions face what I can call temporary solvency and liquidity issues as borrowers may seek to mitigate cash-flow difficulties given macro- and micro-prudential sympathies taken may point in different directions as both regulatory authorities and financial institutions may be forced to implement business connexion measures.
How much tolerance should bosses allow for financial institutions facing solvency and liquidity difficulties could take? While some banks, in my view may be in a much stronger position today than they were going into the global financial crisis in 2007/08 is this true of all banks and all financial institutions could make a difference.
For insurers, my view is that they may face declining creditworthiness as a result of sharp declines in asset prices leaving a tough question on what should be the response to this? Unquestionably, the coronavirus crisis, despite vaccines that are beginning to be administered, in my calculation will be the breaking point for some financial institutions.
The question then rests, should they then be allowed to nose-dive? Is there a role to allow borrowers with impermanent cash-flow difficulties to delay interest and capital repayments? And where lenders with huge concentrated loan risk grant such healing, how should this be echoed in the classification of these loans? The present situation, much as some, not all may try to fold their eyes on what is best options may be a classic example of where macro-prudential capital buffers should be detached to free up capacity to preserve the flow of credit.
But again, how do micro-level board of directors may view this? Will they concur with lower capital needs at a time of declining asset quality and higher levels of non-performing loans (NPLs) whose effects is fatal to lenders? Would micro-level directors prefer to retain capital requirements as protection against current and prospective exposures? What if the economic situation worsens further due to a new variant of the pandemic SARS-CoV-2 coronavirus believed to be spreading rapidly in Britain, Brazil and South Africa and already prompting high level of concern among countries leading to extra cut transport links? Isn’t time to be complacent.
The coronavirus outbreak demonstrates the importance of business continuity planning, crisis preparedness and crisis models. Of-course increased working from home carries with it some risks. Working from home, in my view, much as it could be regarded as a solution creates its own operational risks.
For instance, in sustaining concealment, in accessing files and information, the inability of key decision making boards to meet physically, and greater prospects for market abuse, for example through the use of unrecorded telephone lines, to mention a few remain at risk.
The bottom line, any measure to mitigate the data privacy and security risks connected with working distantly, in my understanding will need an investment of time, not money, through approval of rigorous policies, plans and employee behaviour adjustment.
In this way, as employees whether for public or private sector entity can conserve good privacy and security as entities grapples with measures to respond to covid-19 pandemic and its spread.