The cycle of rising prices that began in early 2021 is showing no sign of easing. Central banks around the world have been tightening monetary policy, but prices of everything from consumer goods to raw materials keep marching higher — pushing the global economy closer to the brink of recession.
The situation requires a delicate balancing act for banks. Higher interest rates are good for profitability in the short term, but corporate and retail customers battered by high inflation could find themselves in trouble down the road. It isn’t enough to report booming earnings results now — banks also need to take steps to help their clients weather the storm tomorrow.
While all banks face a version of this conundrum, conditions across the globe differ — and require a different set of responses.
European banks: focus on reputation
Perceptions matter, and banks across Europe need to be mindful of their reputations over the long term. By announcing high profits against a backdrop of consumers struggling with the cost-of-living crisis, banks could damage their public image — and prompt governments to intervene if there is a perception that banks aren’t treating customers fairly. In a recent article published by Euromoney, Elie Farah, Oliver Wyman’s head of financial services for Europe, identified some of the steps banks can take to help their customers navigate this environment.
She argued that European banks should act swiftly in passing higher interest rates onto depositors and taking steps to flag upcoming rises in expenses with their customers. They also need to take measures to support customers experiencing short-term difficulty by enabling them to switch to interest-only repayments or to lengthen the duration of mortgages. If banks aren’t seen to be providing this type of support, there could be government intervention down the line.
Though there is always pressure to generate increased profits, banks also must pay close attention to their reputations to avoid a scenario in which anti-bank sentiment grows. By helping to tackle the crisis, the banking sector can ensure its ongoing relevance in the long term.
People may see that the government is forcing the banks to do things that they should have done themselves. The natural response to higher inflation will be to go to the chief risk officer, revise rates, and tighten credit policies, but it's not just a credit decision. Banks should be seen to be helping their customers navigate this environment, not just prioritizing their bottom line.
Asian banks: prepare for a range of inflationary dynamics
Asia’s average inflation rate jumped nearly four percentage points over the past 12 months. Currency weakness against the US dollar is exacerbating cost increases across the economy.
What is the impact on Asian banks?
Three scenarios are all in play: a hard economic landing, stagflation, and a soft landing. We detail what they might look like in our latest report.
Inflation rates are diverging across the region and so will required nuanced responses. Southeast Asia and India are most exposed; China is least exposed. Hong Kong is dealing with low inflation but rapid interest rate increases.
How can banks respond? They should invest in granular models to assess the impact on borrower-level impact, review fund transfer pricing (FTP) frameworks and ensure front-line staff can price risk effectively, and understand the value of deposits in a rising interest rate environment. They also need to help clients grappling with FX and cost volatility to optimize funding and mitigate risks. And they need to manage operating costs and be prepared for multiple inflation outcomes region-wide.
US banks: provide capital and liquidity
The US banking system is in better shape than its European and Asian counterparts, thanks in part to the regulatory overhaul that followed the global financial crisis. Oliver Wyman’s Til Schuermann, a partner and co-head of the finance, risk, and public policy practice in the Americas, argued in a Fortune commentary that banks’ relative strength now gives them an opportunity to serve as a shock absorber for the rest of the economy.
By using their considerable balance sheets to continue financing growth while absorbing loan losses, banks now have the firepower to blunt the effects of an economic slowdown and help hasten recovery.
In addition to helping retail customers restructure their borrowing terms, US banks can help businesses and companies by providing both short-term financing and capital to fuel long-term growth.
The inflation crisis presents different considerations for banks in different parts of the globe. But one common goal all banks should share is to help their customers get through the storm as quickly — and safely — as possible.
Rising inflation is compounding the impact of the pandemic across the aviation industry. Volume four of The Inflation Shift examines how inflation is shaping different sectors in the aviation industry and what consumers can expect from airlines in the coming months. Published on LinkedIn.