Tuesday, July 5, 2022

How Pandemic Threats Can Impact Financial Institutions

Financial markets react to natural disasters from volcanos to acts of terrorism, but there is limited knowledge of how epidemics impact the world economy, How Pandemic Threats Can Impact Financial let alone pandemics.

The potential impact of COVID-19 on the financial markets has much to do with levels of spillover associated with other catastrophes. How Pandemic Threats Can Impact Financial

You have to read the latest financial news to learn more about how the pandemic affects financial institutions.

Research on the impact of terrorist attacks on the financial markets might provide some parallel. Terrorist events abroad, How Pandemic Threats Can Impact Financial by their nature, are designed to create a widespread change in the public mood even it is far away from your neighborhood.

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For instance, let us compare the COVID-19 outcome to an imagined nuclear conflict. Nuclear conflict is not survivable by anyone on Earth. Apart from signaling economically impacting international tensions, a mere threat of nuclear war has almost no impact on market prices. The reason is that the probability of it erupting, in reality, is low, but since it is a non-survivable event, other outcomes are irrelevant.

Economic Destruction

The economic destruction caused by COVID-19 is almost similar to the US’s unprecedented $2.2 trillion bailout package versus the $750 billion packages during the global financial crisis. But, unlike a worldwide nuclear conflict, COVID-19 is survivable, and financial markets’ value will remain highly relevant. In all likelihood, there will be a significant global financial market reaction the next time there is a sudden outbreak of an epidemic.

GDP Forecasts

COVID-19 has affected the forecasts of gross domestic products (GDPs), the risk of sovereign bonds, and the companies that rely on suppliers in impacted countries such as call centers in the Philippines and India. Your portfolio of Asian sovereign bonds is also at risk, but the impact is more across executive travel and employees’ job security.

Risk Management

Pandemic risks also make financial systems think twice about operational risk and management. Organizations remind us how threats from contagious disease outbreaks are more significant than other operational impacts. Pandemic threats require coordination across business functions, supply chains, employee health, investment credit, and lending portfolios. Pandemic scenarios and responses must be constantly updated, forming new projections and further mitigating actions.

Inevitably, when there are public health threats, from outbreaks to full-blown pandemics, the financial sector faces operational, economic, and employee protection risks.

Significant Impact

The COVID-19 pandemic significantly impacted financial institutions worldwide in 2020 because it diminished economic activity. Operations averaged about 80 percent of pre-crisis levels.

The outbreak continues to cause widespread concern and economic hardship for consumers, businesses, and communities across the globe. The situation is changing quickly with widespread impacts.

Most firms already have business contingency plans, but they may not fully address the fast-changing unknown variables of an outbreak like COVID-19.

They need to consider the quarantine regulations, proposed school closures, and travel restrictions that may occur during a health emergency for an extended period.

Digital Transformation

The impacts of COVID-19 continue to challenge both business and community leaders. On the positive side, they prioritize investment in people and digital transformation. They are pursuing growth and innovation even in new hurdles such as inflation, talent shortages, supply chain complications, digital disruptions, and social unrest.

Learning to operate and interact with customers remotely became a matter of routine during the crisis. Digital transformation such as mobile and Internet banking was already a corporate priority for most financial institutions.

Liquidity

In the wake of the pandemic, both regulators and financial institutions are steering through unchartered waters. Maintaining cash and liquidity is the biggest challenge facing the banking sector. They also have to navigate complex government welfare measures to weather the current crisis.

However, unlike past crises, the decline in lending was not due to liquidity’ dry ups’ in the financial system. The low levels of new business are more likely due to a substantial reduction in demand due to the impacts of mobility restrictions on income flows for companies and households.

Following many businesses’ disruption and closure, the scope of impact to individuals, small and medium enterprises (SMEs), and large corporates is still unknown. It has led to a cash flow crunch affecting economic and financial market stability.

Evidence of this is the measures taken by regulators to ease restrictions on liquidity and capital. It has helped banks fill this role though the length and severity of this outbreak remain uncertain.

Banks

Banks play a crucial role in ensuring the availability of funds is sufficient to support individuals and businesses. They may need to revisit their existing liquidity stress models since the economic outlook remains highly volatile. They have to brace for more credit losses than previously calculated, increasing expected loan loss provision.

The bottom line is that the crisis’s length and severity are still unknown both locally and globally. Actions taken by regulators are only temporary facilitative measures. While regulators will not suspend the interim conducive measures without due warning overnight, banks should be preparing for any adjustment to a new normal.

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