This article was first published on June 5, 2020.
Editor's note: Oliver Wyman is monitoring the COVID-19 events in real time, and we have compiled resources to help our clients and the industries they serve. Please continue to monitor the Responding To Coronavirus Hub for updates.
By Chris Allchin, Matt Austen, Ross Eaton, Serge Gwynne, Mike Hepinstall, Patrick Hunt, Ted Moynihan, and Ian Shipley.
The banking industry has a crucial role to play in helping the global economy weather the coronavirus (COVID-19) pandemic and return to growth. Yet banks face an enormous challenge in supplying the economy with credit: dealing with the uncertainty of future credit-worthiness and how this will be affected by the course the pandemic takes.
Critical decisions need to be made now based on an understanding of the increased risk across the economy, differentiating across individual businesses and consumers, and understanding which effects are temporary and which are permanent. This won’t be like a normal recession; the impact will be highly asymmetric and influenced by public policy decisions.
As a result, banks face four challenges in supplying credit. First, how to incorporate all the new and constantly changing information on the pandemic and manage against a nuanced set of scenarios. Second, understanding the impacts of COVID-19 over time across each corporate sector, given their financial condition and future consumer demand. Third, managing consumer credit portfolios when traditional indicators of payment behavior are distorted and payment capacity is highly uncertain. Finally, banks must upgrade their models to support loan loss provisioning and capital requirements with only intermittent regulatory guidance.
In the third installment of our Pandemic Navigator Series we share some of the insights we have gleaned from our work with leading financial institutions, and then look more broadly at the likely impacts on bank financial returns and capital.
The entire credit and balance sheet management architecture of banks, built over decades, is being upgraded in a matter of months.