COVID-19 and the banking and capital markets industry

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Practical steps for responding to the coronavirus crisis

The coronavirus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is changing quickly with widespread impacts. We’ve prepared some general guidance on COVID-19: What US business leaders should know with respect to crisis management and response, workforce, operations and supply chain, finance and liquidity, tax and trade, and strategy and brand.

Most companies already have business continuity plans, but they may not fully address the fast-moving and unknown variables of an outbreak like COVID-19. Typical contingency plans don’t generally take into account the widespread quarantines, proposed school closures, and added travel restrictions that may occur in the case of a health emergency that could last for an extended period of time.

The crisis raises a number of unique challenges. In PwC’s inaugural COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns. 


What are your top 3 concerns with respect to COVID-19? (Select up to three.)

Financial impact, including effects on results of operations, future periods and liquidity and capital resources
%
Potential global recession
%
The effects on our workforce/reduction in productivity
%
Decrease in consumer confidence reducing consumption
%
Supply chain disruptions
%
Difficulties with funding
%
Not having enough information to make good decisions
%
Impacts on tax, trade, or immigration
%
Cybersecurity risks
%
Fraud risks
%
Privacy risks
%
Source: PwC COVID-19 US CFO Pulse Survey
April 22, 2020: base of 305

What makes the banking and capital markets industry different:

Crisis management and response

Issues the banking and capital markets industry might face:

Communication is a key part of effective crisis management. For banks and capital markets firms, this takes on heightened importance because trust and reputation are integral to what they offer clients.

The industry has many stakeholders, but three are particularly important during these challenging times:

  • Regulators will want to know that boards are engaged, capital and liquidity standards are appropriate and risk management is effective.
  • Clients (whether retail, commercial, corporate, or institutional) will want reassurance that their financial institutions are strong and stable — even if their own finances are under stress.
  • Employees need to know about their personal safety and about how their jobs may change.

When done well, crisis management should let you keep working with your customers in areas such as new lending, refinancing, trading volumes, settlements, collateral/margin maintenance and more.

Cybersecurity is also a key part of crisis management, because there can be additional vulnerabilities in the middle of a storm. This is because of significantly higher levels of remote access to data and core systems, and because employees and management could be more susceptible to social engineering efforts in the midst of a crisis.

Steps to consider:

We are all starting at the same baseline: Unlike a cyber breach or a reputational scandal, COVID-19 affects all firms, and, for the most part, regulators and clients already understand the basic facts about what’s happening.

  • Work with industry groups to share suggestions. (Regulators have already shown a willingness to consider good ideas.)
  • Communicate frequently and honestly with your clients to update them on your approach. Let them know how you’re addressing the situation, and if/when they should revise the way they think about risk.
  • Reach out to regulators and professional advisors at the first sign of trouble.

Don’t let this crisis distract you from your compliance responsibilities, which in some ways are more important now than ever. Regulatory compliance efforts, such as maintaining capital levels, appropriate review, supervision and surveillance, and anomaly reporting, have to be key priorities.

You’ll also want to look at ways to strengthen your cyber protections because of rising cyber attacks aimed at exploiting the crisis. We recommend taking these steps now:

  • Remind employees about being suspicious of emails from unfamiliar sources to counteract attempts at phishing and compromising business email. 
  • Conduct a phishing exercise now to reveal gaps in your defenses.
  • Strengthen your perimeter using security tools to identify and deflect threats before bad actors can intrude.
  • Strengthen your remote access management policy and procedures. Make sure working from home doesn’t mean working without security. It’s now possible to transition to rapid, secure, remote work models more quickly than ever before.
  • Fortify your endpoint protection, and make sure devices and software are hardened and patched.

Workforce

Issues the banking and capital markets industry might face:

On-location activity is particularly important for some industry roles, as with traders who need robust, real-time communication and sales teams that are subject to specific compliance monitoring. This creates a variety of workforce challenges that have been largely untested at scale — until now.

You may need to restrict access to some physical facilities, in whole or in part, in advance — before they are exposed to the virus. Some employees may be frustrated when asked to work elsewhere. You may also find that some employees don’t have appropriate physical environments for remote work, or that your supervision and review processes aren’t adequate in those situations. In some cases, you may not have enough qualified employees to do the work that has to be done. 

Many of the largest banks have already invoked plans that would split teams into different locations on alternating schedules to diffuse the infection risk.  We’ve seen efforts to limit office movement and redesign office space to increase the distance between workers. Some firms are going further, restricting or even banning contractors and other visitors. But no single firm seems to be applying a single method across the board.

Steps to consider:

We encourage you to consider where your employees will work, how they may feel, and how you’ll lead:

Staffing

  • Be flexible with work arrangements as appropriate.
  • If your videoconferencing or other network technologies can’t handle the load, explore technology solutions that can.
  • Set up risk mitigation programs for employees who may still need to work on-site.
  • Be prepared for a spike in calls to customer care centers. You may need to redeploy staff, or scale  up or down by using contingent workers. Automated systems can help, but your clients may most appreciate human empathy.

Dealing with stress

  • Recognize that the current situation could be profoundly unsettling for many employees, some of whom may be dealing with medical issues, childcare challenges, family income disruption and more. You may want to include efforts to measure the “pulse,” or morale, of the workforce.
  • Communicate clearly and concisely with employees about steps you’re taking to reduce stress while you plan.
  • Your firm should review its plan for employee absenteeism, to be sure it is appropriate for the current environment.

Managing your business

  • Adjust HR policies to align with local regulations (e.g., entitlement to continued pay during quarantine, covering costs of medical tests). Consider expanded back-up child care services for employees. Consult with risk management and legal teams about liability for newly remote employees.
  • Refine performance expectations. Account for a learning curve as you adapt to a change in work locations and processes, and anticipate a dip in productivity. Realign employee incentives related to goals such as booking loans, client profitability or number of refinance transactions — keeping in mind that these goals must advance the firm’s overall objectives. For key roles, such as financial advisors or loans officers, you may also need to reevaluate the design of your compensation planning. Be careful that you don’t create incentives that may adversely affect customers and introduce risks to your reputation.
  • Depending on your compensation planning cycle, consider delaying decision-making until the acute crisis has passed.

Operations and supply chain

Issues the banking and capital markets industry might face:

Physical supply chains are far less significant for banking and capital markets firms than for companies in other sectors. But, these companies  certainly finance clients that are affected by production and distribution interruptions. Banks themselves rely heavily on a network of interlocking vendors, and this has  increased with the advent of FinTech. In fact, virtually every aspect of modern banking and markets now depends on the availability of third parties, such as credit card processing networks, lockbox operators, clearing houses and depositories.

On the wholesale level, trading conditions may deteriorate as workers try to adjust to new physical working environments. This is especially complicated given rapid moves by the Federal Reserve and others to shore up the financial system. With fast-moving and unprecedented shifts in behavior, human intervention in market making could be more important than ever, as you need people to do this work.

Steps to consider:

  • Wholesalers are coping with record volumes and volatility in trading businesses. While regulators understand this working environment is extreme, the pressure may serve to highlight issues that have already been flagged as “Matters Requiring Attention” (MRA). To the degree that this is possible, you’ll want to stay on top of any breaks, disputes, inconsistencies or anomalies — and act quickly to address them. You might want to establish additional lines of communication with your key business partners to speed up the escalation of any business issues.

Finance and liquidity

Issues the banking and capital markets industry might face:

Credit quality may deteriorate quickly in some areas, especially in sectors or geographies that are  hit the hardest. This may overwhelm existing models for Current Expected Credit Losses (CECL), requiring more resources to assess the impact of changing market conditions. This could have an effect on stress-testing in general.

Markets may be highly volatile for some time, and that will make price discovery more challenging. Rapid liquidity shifts and unexpected demand drops are already causing some challenges for market participants that need to “see” pricing. Similarly, volatility and associated dislocations can limit the effectiveness of hedging relationships.

You may find that you need to reassess a wide range of models and analyses for the current environment. For example, decreasing stock price and cash flow forecasts could shift your goodwill assessments. You’ll also want to take into account the recent interest rate drop (and the potential for additional cuts in the future), given the effect on spreads, deposit pricing and funding models as a whole.

Financial firms will also be required to make disclosure(s) about the effect of COVID-19 on their business within financial statements or other SEC filings, based on relevant GAAP and SEC disclosure standards. Affected disclosures could include risk factors, impairment, debt, liquidity, and aspects of Management Discussion and Analysis (MD&A).

Steps to consider:

  • Begin a detailed review of your portfolio as soon as possible to assess how this situation will affect credit quality. Make sure that your key assumptions (your own or those developed by vendors) are still valid, and that the qualitative reserves you’ve identified still make sense. While the situation is evolving quickly, you may want to adjust economic scenarios or the associated weighting of such scenarios within your modelling.
  • Given the reduced price discovery and increased valuation risk, it may be appropriate to enhance your policies and controls surrounding valuation processes. You’ll want to be sure these processes and controls address everything that influences price, including active vs. inactive markets, market dislocation and other factors. Don’t forget to include collateral coverage, which could decrease the guarantees supporting an asset if it were significantly reduced. You may also want to consider introducing new compensating controls, in case issues with staff or availability of third-party valuation data is limited.
  • You may want to strengthen your review of triggering events to be sure that you’re performing asset impairment tests promptly. More broadly, as asset valuations across the financial system shift rapidly in unexpected ways, you may need to rethink how you address risk in your models, and reevaluate the scope of work performed by valuation experts.
  • Finally, it’s not too soon to start thinking about early warning disclosures for financial reporting: assets at risk of impairment, disclosures about risk factors and more. Transparency is crucial for maintaining trust in a crisis, and you may decide it makes sense to change the frequency and content of investor presentations and updates.

Tax and trade

Issues the banking and capital markets industry might face:

Banking and capital markets firms have industry-specific tax reporting and compliance requirements. But the issues they’ll face filing and paying direct and indirect taxes are likely similar to those faced by other industries. For example, subject matter experts may be working at a distance, collaboration tools may not be wholly effective, processes may be undefined and so on. In the short term, these are probably meeting tax compliance requirements and may be manageable, but few firms have tested anything like this at scale over a long period. It should be noted that changing the locations of where employees perform their work may have federal and state tax implications.

We also note that as the government contemplates relief for consumers and businesses, many proposed steps involve adjustments to the tax system. Depending on which measures (if any) are enacted, this could place an additional burden on banking and capital markets tax teams to identify opportunities for companies, as well as to adjust their compliance calculations and processes.

Recent interest rate cuts could affect bank profitability. These, along with a general decrease in business activity, could depress banking profits for some time, and concerns about this have already been reflected in the sharp drops across many firms’ stock prices. This introduces a secondary challenge, because certain deferred tax assets, like net operating losses (NOLs), don’t count fully toward a bank’s regulatory capital requirements. This is likely to compel firms to take other steps to shore up their capital reserves. (It’s important to note, though, that some business lines may actually see higher profits in this market. Banks involved in mortgage refinancing, for example, may actually struggle to keep up with increased demand. Furthermore, any changes to a bank’s operating strategy in this new environment may have significant tax implications.)

Many banking and capital markets firms rely on business continuity plans that have employees working from home or alternate locations. With so much concentration in the New York metropolitan area, this could introduce unexpected tax nexus issues. For example, if a trader works out of a contingency facility in another state for a short period of time, this may not be significant. If the situation persists, though, it may create challenges for companies and their employees as they determine and address the state tax implications that could arise. If alternative work locations include foreign countries, permanent establishment issues also need to be considered.

Steps to consider:

  • Some of the most useful actions here will come later, once the immediate crisis has passed. Your goal should be to build a staffing and operating model that can address the current crisis and adapt to the next one, because there will be a next one.
  • To that end, we note that there has been some legislative discussion about changing limits on NOL deductibility. Some other industries have made the case that the current rules could be harmful in this environment. Restoring the ability of companies to carryback NOLs is one option under consideration in response to the current situation. To that end, you may want to consult with industry groups about signing on to such a request.

Strategy and brand

Issues the banking and capital markets industry might face:

Specific segments of the population are finding themselves in increasingly vulnerable positions. How you respond could be critical to future customer and employee relationships, and it could damage your public image if not handled well.

It’s not just consumers who will be squeezed. We could also see a rise in payment delays due to cash-flow constraints on businesses arising from a temporary drop in demand for services. The hard part: telling the difference between a routine payment delay and significant deterioration in credit quality. 

Banks are working to continue to provide liquidity to markets, which is getting harder given the volatility of the market. But they also need to comply with new Stress Capital Buffer (SCB) rules imposed earlier this year. While many banks lobbied for this change, and it could (in theory) let some reduce their capital buffers, others have observed that new capital constraints could be imposed in the short term, reducing liquidity.

Steps to consider:

  • Lenders could face many more transactional requests, both from borrowers looking for forbearance and from would-be borrowers looking for a deal. Communication and speed will both be valued, even more than usual. 
  • Identify at-risk segments and geographies. You’ll want to develop guidelines to address late and missed payments, even as you develop loss-mitigation strategies. In some cases, customers will need more formal assistance, or regulators may require banks to grant relief. So, you may want to take steps now to develop criteria for assistance programs — and then develop and implement them. (This will require everything from job aids and call center programming to legal review and additional training. The sooner you start, the better off you’ll be.)
  • Right now, accurate, actionable information is in particularly short supply. So, along with developing clear communication plans for customers, employees and regulators, you’ll want to shore up whatever operational processes you can around management information systems. Make sure you’re maintaining and using your ability to “see around the corner,” using dashboards to understand trends in days past due (DPD), margin calls, collateral disputes and other key indicators.

Other considerations

Beyond these pillars, each industry should address some subtleties of its own. Here are some specific considerations for banking and capital markets firms, as well as some guidance on how to respond to the challenges.

Business issues are banking issues. Your retail customers or corporate clients will take steps to manage their own risks. (For example, consumers may use credit lines or skip loan or credit card payments.) You could also see demand change for other financial products. In some cases, clients may become more risk-averse, but you may also see increased refinancing activity for certain products or escalating demand for hedging products.

Capital markets could become less accessible. We have already seen bid-ask spreads widening and volume falling in some asset classes. Amid the surge in treasury activity, there are signs that the repossession market could be under pressure. Depending on how the situation evolves, lending standards could tighten and liquidity could dry up quickly, leading to more credit losses. For now, some counterparties are liquidating assets to deleverage, but the underlying conditions are still fairly strong. If this continues for a longer period, though, it could lead to cash flow challenges for banks and their clients.

Interest rates are lower, for longer. We’ve never seen global interest rates this low at this point in an economic cycle. Now that Fed rates have dropped again, the industry is contending with even lower levels of interest income and more margin pressure. (As we write this, some rates are more than 100bps lower than they were last fall, when annual budgets were set.) Regional banks, which have about two-thirds of their revenue tied to interest income, were already dealing with this before the current crisis when their average ROE slipped in the second half of 2019. On a more fundamental level, banks will be watching to see if the business environment degrades enough to cause real stress for companies with good operating fundamentals. If that happens, defaults and bankruptcies will undoubtedly occur.

The way forward

In a time of global uncertainty, it’s easy to lose sight of the big picture. This is particularly true when memories of the last recession are still relatively fresh. But it’s worth acknowledging just how different the current situation is from where we were a decade ago:

  • Today’s financial system is far more resilient. Many of the structural reforms put in place have led to increased oversight and larger reserves. These are designed to strengthen our ability to withstand systemic shocks and, by all accounts, they seem to be working.
  • Many consumers are better prepared. While consumer debt is at an all-time high, it’s far lower relative to GDP than it was a decade ago.
  • Our economy is stronger. The US economy has been chugging along productively, with unemployment at historic lows. Corporate debt is — for now, at least — more likely to be repaid.
  • The damage is likely to be more contained. Certainly, some industries are reeling from a precipitous drop in demand. But, at least in theory, the danger could start to recede in months rather than years.

Core principles

This is where it makes sense to go back to first principles: What is your company’s reason for being? Especially in a crisis, you’ll want to double down on the things that make your organization stand out. We encourage clients to identify appropriate opportunities for succeeding given the market as it is now and as we expect it to be. From there, you can shift investments to "good" costs and away from "bad," redirecting spending to the areas that will lead to sustainable, long-term growth.

This is also an opportunity to demonstrate your commitment in what you do, rather than just what you say. Your purpose and values aren’t just words on a wall. Now, when some of the people you serve may be among the hardest hit, this is a chance for your leaders to show what your brand stands for.

For now, with such uncertainty around valuations and credit quality, we expect that many M&A transactions will be shelved until the dust settles. But, over time, this environment could easily lead to additional and much-needed market consolidation. Banks with strong balance sheets will likely have an opportunity to acquire weaker competitors at reasonable prices, if the duration of the crisis or its impact extends for some time. In this way, consolidation can help strengthen our banking system by creating opportunities to improve efficiency at scale and jump-start transformation projects.

For some companies, the COVID-19 crisis may also highlight  issues that have needed attention and can no longer wait. When your team can’t get to the office, you may discover how many manual workarounds your company has put in place for routine activities. Suddenly, finance and human resource transformation becomes more important. When your data centers are located in affected areas, or scammers try to take advantage of market noise, cloud transformation and fraud/economic crime solutions become higher priority.

Whether you’re trying to protect business integrity, empower your people, make better and faster decisions, or transcend through technology, it helps to take a long view. Once this crisis passes — and it will — where do you want your business to be?

For more than a century, our purpose — to build trust in society and solve important problems — has been at the core of everything we do. We stand ready to help you.

Contact us

Peter Pollini

Banking and Capital Markets Leader, PwC US

Kurtis Babczenko

Banking and Capital Markets Advisory Leader, PwC US

Nabi Niang

Banking and Capital Markets Assurance Leader, PwC US

Greg Litton

Banking and Capital Markets Tax Leader, PwC US

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