How The Coronavirus Pandemic Will Affect Banking

Benjamin Ensor Director of Research & Strategy

20th March 2020 • 15min read

The travel bans and social distancing measures necessary to control the Covid-19 pandemic are shutting down entire sectors of the economy, triggering massive economic consequences that will quickly feed through to banks. Business as usual is over. Banks need to act fast to prepare and protect their customers and employees as far as possible from the worst outcomes.

The deadly Covid-19 virus has hit the world hard, killing thousands of people, putting entire countries into lockdown, and shutting down many aspects of normal life. The vital actions necessary to control the global pandemic and save lives are causing an economic crisis that threatens the livelihoods of millions of people. While the absolute priority is to save lives, the long-term consequences for people’s livelihoods are also serious. How serious depends on how quickly countries around the world are able to contain and control the virus, how effective national healthcare and social security systems prove, and how quickly central governments act.

• Whole sectors of the economy are shutting down. Industries like travel and manufacturing have been hit hardest so far, but every sector is being affected to some extent. Bookings, and therefore revenues, have collapsed in businesses like airlines and hotels. Other sectors, notably bars, restaurants, cinemas, gyms, sports clubs and other leisure activities, are also either losing business or being closed down as a result of social distancing measures. Many countries have also now closed schools.
• Stock markets have crashed. The past couple of weeks have seen some of the greatest losses in the world’s stock markets in decades. Corporate bonds have fallen sharply too, as investors start to fear that some big companies will go bust.
• Workers are being laid off. With revenues sharply down, many businesses without substantial cash reserves have little choice other than to lay off workers or, at best, ask them to take unpaid leave. Many airlines have already had to lay off workers.

Banks are quickly being drawn in to this crisis. Faced by such a sharp change in the economic outlook, banks, credit unions and other lenders in most countries need to brace themselves for widespread economic disruption and a recession, potentially a deep one. That will inevitably lead to loan losses. Things that seemed unthinkable a few months ago are no longer unthinkable. While it is impossible to predict the long-term effects of the pandemic, it is increasingly clear that:

• Entire sectors of the economy will be shut down for months. While the manufacturing industry may slowly find paths around the disruption to global supply chains, it is hard to see the travel or leisure industries, including restaurants, recovering until the pandemic is under control. Education and retail, too, may not return to normal for months.
• Many smaller businesses will struggle, then fail. Many businesses, including startups, will quickly burn through their cash reserves, leaving them unable to continue paying their employees. Depending on their trade, the self-employed, freelancers and other gig economy workers are particularly vulnerable. Many small and medium-sized businesses will struggle to last through a sustained economic downturn. Some can only last for days before they run out of cash.
• Millions will struggle to repay their debts on time. As businesses and consumers see their earnings drop, or disappear entirely, millions will quickly become unable to repay their debts on time, and struggle to pay other bills, like rent, mortgages, loans, credit cards, insurance and utility bills. Without government action, millions of people (and companies) will go bust. The credit outlook for banks’ loan portfolios has deteriorated sharply over the course of just a few weeks.
• Potential outcomes are wildly unequal. While healthcare workers are literally putting their lives at risk and workers in sectors like travel and leisure face the loss of their livelihoods, workers in sectors like media, government, professional services and financial services face little more than the inconvenience of extended working from home while looking after children. Lower-income workers will be hit far harder than higher-income office workers. Social security protections vary enormously from country to country; millions of people have little or no safety net.
• Consumer spending and business investment will drop sharply. As the uncertainty created by the pandemic hits home, both consumers and businesses will quickly rein in discretionary spending and investment. Combined with social distancing measures that keep people inside, the economic uncertainty will quickly feed through into reduced spending in sectors like retail, automotive and property. Banks like the UK’s Starling Bank are reporting sharp changes in customers’ spending patterns.
• The pandemic will be followed by a mental health crisis. Health workers, and the victims of the virus and their families are obviously under an immense strain. The anxiety caused by serious illness, the threat of serious illness, and the loss of livelihoods will trigger widespread mental health issues. Banks have an opportunity, and perhaps an obligation, to do everything they can to support their customers’ financial well being, and hence their mental well being. You can read more about what banks can do to support customers’ mental health here.

Retail banking is already changing sharply as a result of the epidemic.

• Credit lines will quickly be stretched. As they struggle to make payments over the next few months, struggling businesses and consumers will quickly draw down and spend through existing credit lines and credit-card limits.
• Credit ratings, and outdated risk models, will become meaningless. Millions of careful, frugal consumers and business owners have been blindsided by the impact of the pandemic. This sudden, unforeseeable, loss of income will quickly make a nonsense of traditional credit rating models -- some of which were already barely fit for purpose. Losing your job in a pandemic because you work for an airline or for a restaurant doesn’t make you a poor credit risk -- but traditional credit ratings will treat you that way.
• Contact centres have to become virtual, even as volumes skyrocket. Incoming call volume from worried customers is skyrocketing at the very time bank contact centres are being forced to close because of coronavirus cases, such as at UK bank Halifax’s contact centre in Belfast. The social distancing measures in many countries mean that most bank contact centre buildings have been or need to be closed and those contact centres shifted to remote operation.
• Branches are closing and branch use will fall sharply. People will leave home less often, and be far less likely to visit branches. Banks will need to decide which branches remain open, and how to keep those environments safe for employees and customers. Banks like Intesa and UniCredit in Italy, and Commerzbank and HypoVereinsbank in Germany, have already closed many branches. Similarly, the big Canadian banks are closing some branches and reducing operating hours at others. That will mean that some customers become cut off from banking services.
• Cash use will fall. Because the virus spreads through person-to-person contact, fears that notes and coins can spread the virus are natural and justified. The virus can persist for days on surfaces. The World Health Organization has said that contactless payments could reduce the risk of transmission. Combined with social distancing and a slowing economy, a fear of contagion will further reduce cash use in many countries. Contactless payments are better, until you have to enter a PIN. Digital payments are best of all.

Only central governments have the legislative and economic firepower to avert, or at least mitigate, an economic crisis. That will require vastly higher government borrowing. With governments rightly focused on saving lives, the unprecedented economic challenges and lack of easy solutions mean that government financial support may be uneven, poorly directed and too late.

• Government loans won’t help (much). While bridging loans from the government, banks or other sources may help businesses or individuals meet a few monthly payments, the long-term result is just more debt to be paid off.
• Lower interest rates won’t help either. In a normal economy, lower interest rates help to stimulate demand. But much of the world no longer has a normal economy. Lower interest rates will reduce borrowing costs, but won’t stop businesses with no customers from folding.
• People (and businesses) will need rent and mortgage relief. Large monthly bill payments will quickly crush many households and small businesses. The government of Italy has suspended mortgage and rent payments. The French government has suspended utility bills and rent for small businesses. Other countries need to follow suit, and quickly.
• Companies will need financial help to retain workers. The Danish government has agreed to pay as much as 75% of the wages of some private sector employees rather than see them laid off.

Business plans drawn up six months ago are no longer relevant. Banks need to act fast to look after their own employees and help customers whose financial situation has deteriorated sharply in a matter of weeks or days. Banks must prepare for the worst, while hoping for the best. There are no good outcomes here, only less-bad ones. If in doubt, do the right thing for customers and employees. Banking leaders should:

• Look after your own employees. Put the health and safety of your employees first, which means reducing the danger of exposure to the virus in both bank branches and back offices. Banks in many countries have already asked or ordered employees to work from home. BBVA in Spain, for example, has cut its branch workforce to 20% of normal. Where branches remain open, limit direct contact between employees and customers and make sure that both branches and ATMs are being cleaned and disinfected throughout the day.
• Cross-train employees for vital skills and functions. Look for critical dependencies should a single employee be taken ill. Train other employees now so that you have a backup in place for critical skills and roles.
• Retrain branch employees as virtual contact centre employees. Many banks have both a sudden drop off in branch use and a sharp increase in contact centre volumes as anxious customers seek to renegotiate their loan repayments. The obvious solution is to train branch employees to support customers remotely. That creates urgent technology and training challenges for banks to set up and teach branch employees how to serve customers by telephone or video from home.
• Communicate frequently with customers to reassure them. Banks must communicate regularly with customers to avoid an information vacuum. In the UK, for example, firms like Halifax, Nationwide Building Society, NatWest and Royal Bank of Scotland have been informing customers about support to cope with the effect of the pandemic through emails and in-app messages. Leading banks like Commonwealth Bank of Australia and Royal Bank of Canada have published extensive communications about what the pandemic means for customers.
• Implement a loan repayment holiday to avert defaults. In the UK, banks including Lloyds, Royal Bank of Scotland and TSB are offering repayment holidays on mortgages and loans to avoid defaults. Similarly, Canada’s six biggest banks -- Bank of Montreal, CIBC, National Bank of Canada, Royal Bank of Canada, Scotiabank and TD -- are allowing the deferral of mortgage payments for up to six months. Australia’s banks are likely to follow suit. In the US, BBVA is offering payment deferrals, extensions and waivers on existing loans and lines of credit. You can read about some of these banks’ actions in more detail here.
• Reserve some branch hours for vulnerable customers. In the UK, Nationwide Building Society intends to open 100 of its branches at 8am, rather than 9am, reserving the extra hour for elderly and vulnerable customers, who will also benefit from an overnight deep clean of the premises.
• Encourage digital payments. Canadian credit union Vancity has waived electronic transfer and ATM fees until the end of April to encourage digital banking use. Banks should also help business customers to accept digital payments, even in stores, so customers don’t need to touch PIN pads.
• Set up a communication plan for a bank run. Given that consumers in many countries were stockpiling toilet paper and food before there was any need to, it is all too easy to imagine false rumours fuelled by social networks causing a run on a particular bank, or banks in general. Make sure that your marketing team has a contingency plan in place in case false rumours about financial stability start to spread.