Disruptive economic fallout

The profound humanitarian fallout of the COVID-19 crisis carries with it the potential equally disruptive economic fallout. The path ahead is hence a precarious one, driven by epidemiological uncertainty. The unique blend of resulting shocks to both supply and demand, and “preexisting conditions” in the global macroeconomy.

Leadership in the time of coronavirus: economic fallout

economic falloutAt this writing, Europe has become the prime epicenter of the crisis, with nearly 75 percent of new cases reported globally on March 18th (Exhibit 1). In Italy, years of low growth and high government debt are colliding with the rapid spread of the disease in an elderly population. Spain and France, face similar prospects, as do many countries in Asia. Thailand, for example, is similarly reliant on exports and tourism receipts and already has one of the highest debt burdens in the region at around 75 percent GDP. The particular characteristics of the US economy may make it susceptible to the impacts of COVID-19, despite its general strength before the virus’ arrival. A high number of households and businesses are vulnerable to the impact of disease-containment measures. Because of their high debt burden. This article is brought to you by Car Loans of America.

Essential services during COVID-19

Essential servicesAt the same time, yield chasing over the past several years may exacerbate the potential for market illiquidity. The Fed and the European Central Bank (ECB) have already cut rates to zero; historically low rates limit the tool kit of other central banks, and several global regions are probably already in recession as many economists and the latest data from China suggests. Addressing the situation will require further global action and public-private coordination. Banks around the globe will play a critical role in this as a systemic stabilizer for their customers, their employees, and their economies at large. Cash and deposit services, credit extension, payment facilitation, and market-making are all essential services.

This memo lays out our initial recommendations for actions that banks should take now. Beyond what common business continuity plans or crisis response checklists suggest. In their immediate response, we believe institutions should plan for an acute period of multiple months, spanning their entire footprint, and with a view of all stakeholders. Not the more constrained circumstances that business continuity plans typically address. At the same time, banks may begin to stress test their capabilities and financials, laying the groundwork for identifying long-term strategic implications and ensuring a smooth bridge between the present and future.

Immediate response

Immediate responseBanks have already taken a series of actions in reaction to the spread of COVID-19. Common steps we’ve seen include establishing a central task force, curtailing travel, suspending large-scale gatherings, segregating teams, making arrangements for teleworking, and refreshing external-vendor-interaction policies.

Beyond these immediate and basic actions, banks should prioritize three measures tailored to the particular combination of biological and market stresses and how they affect the global market. These points draw on the experience of China, Italy, and several other countries. Acknowledging that differences exist in economic and political structures, healthcare systems, and social and cultural norms among these countries.

Normalize workforce measures for multimonth sustainability

As a top priority, nearly all firms have already taken proactive measures to protect their people and to contain the spread of COVID-19. These include restricting travel and taking other prevention-oriented policies, emphasizing workplace hygiene, offering alternative ways of working, and initiating proactive communication.

workforce measuresHowever, health measures to contain propagation may take months, not days or weeks, as we’ve seen in China. Therefore, banks will need to make sure the measures they have put in place are sustainable. And are designed to get the best out of their people. While preserving their mental and financial well-being over such a period. Further, specific consideration will be required for contingent and contract workers, who might be most immediately impacted.

Because banks are providers of essential services to customers and communities, and the markets more broadly. They will need to adopt a carefully segmented approach to workforce management. Informed by service criticality and exposure risk (Exhibit 2). Particularly careful attention is required for those in the workforce who provide critical services. That is either customer-facing or that require infrastructure only available at work premises. These include, for example, branch employees, some call-center support, sales and trading personnel, employees in the Treasury function. As well as some facilities and custodial staff. Korea’s Shinhan bank directed 150 of its call-center staff to work remotely. To handle activities that do not require access to customer information, such as queries on financial products. More detailed requests they forward to colleagues who continued working in the office.

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