Introduction
The COVID-19 disease was first reported in China in December 2019. However, due to inadequate measures to prevent the range, the disease quickly spread around the world. The epidemic soon became a pandemic, which has not been stopped. Most people have mild to moderate respiratory symptoms, but the disease is a threat to older people or people with underlying medical conditions (Coronavirus, 2020). Since no vaccine for the virus has been developed, the only containment option is the lockdown introduced in most countries. However, while effective in containing the virus, travel restrictions and shutdowns will have significant economic implications. The greatest negative effect will be felt by people in need of financial assistance and small and medium-sized enterprises (SMEs). This paper aims to explain how the pandemic affected the financial risk position and lending policy of the financial institutions, and provide a specific bank case that affected the crisis.
Characteristics of the Covid-19 Pandemic
Wuhan Province in China became the first place on the planet to experience a coronavirus outbreak. Within a month, the virus spread to Italy, Germany, Spain, France, Great Britain, Turkey, the USA, and then Mexico, Brazil, Russia. After six months of the global pandemic, more than 9 million infection cases were recorded (Dreisbach, 2020). In an effort to stop the spread of the virus, most governments decided to close public spaces, schools, and offices, ordering people to work from home. Therefore, the service sector and production completely stopped working. Besides, severe restrictions were imposed on people and goods’ movement across borders, affecting the tourism industry and international trade (Wójcik & Ioannou, 2020). The pandemic also hit non-COVID-19 health services provision, as most doctors are busy fighting the virus.
The United States has become one of the countries most affected by the pandemic. It happened due to the federal government’s inadequate response and the inconsistency of actions in different states. In the fight against the pandemic in the United States, it turned out that age and race were critical to the severity of symptoms. In particular, the death rate from COVID-19 was twice as high among African Americans and 40% higher among Native Americans than whites (Dreisbach, 2020). Doctors attribute this to a lower quality of health care services in these groups, which leads to a greater number of comorbidities such as diabetes, hypertension, cardiovascular disease, and lung disease.
Unfortunately, vaccines for the virus have not yet been developed, although work on vaccines continues. Doctors agree that the unprecedented high death and case rates in the United States were because control measures were not taken seriously when the first cases were discovered. If the United States followed the example of Singapore or South Korea, the consequences could be very different. Recent studies have shown that antibodies to the virus can only last for two months (Dreisbach, 2020). Therefore, for now, social distancing is the only effective measure to contain the virus.
Impact of the Pandemic on the Financial Risk Position of the Financial Institutions
Financial institutions or banking institutions usually act as intermediaries in financial markets. Depository institutions that operate with loans and deposits include banks, credit unions, and trust companies. Then, contractual institutions are presented by insurance companies and pension funds. There are also investment institutions like investment banks, underwriters, and brokerage firms. Noteworthy, financial institutions tend to invest in similar areas and implement analogous business strategies. As a result, some target groups can have fewer chances to receive a credit or investment than others. In terms of COVID-19, this may be unpleasant news for SMEs and individuals who are most affected by the pandemic.
Financial position is the condition of the assets, liabilities, and equity of an organization. Financial risk is the risk associated with financing, such as loans to a company with the default risk. There are several types of financial market risks, including stock risk, interest rate risk, foreign exchange risk, and commodity risk. Stock risks are usually associated with the volatility of stock markets and the risk of changes in stock prices. As a rule, riskier stocks are associated with companies doing business in emerging markets that are considered volatile.
Further, interest rate risk implies the risk of changes in interest rates and may affect the bank’s financial position. For example, with an unexpected increase in deposit interest rates or a decrease in loan interest rates, the bank may lose significant amounts. Foreign exchange risk is associated with changes in foreign exchange rates that impact the value of goods, assets, and liabilities denominated in foreign currencies. Besides, fluctuations in foreign exchange markets affect the import and export of international companies. Finally, commodity risk is associated with a sharp change in commodity prices.
The COVID-19 pandemic has significantly affected all existing economic processes. Scientists Nicola et al. (2020) note that the decline in production rates affected primary industries that produce raw materials and industries providing services. In particular, as a result of the pandemic and the global collapse in demand for hotels and restaurants, prices for agricultural products fell by 20% (Nicola et al., 2020). For industrial companies, the challenges are supply chain disruptions, falling imports, and staff shortages. The industry expects a slowdown in growth, even for large enterprises.
Equity markets also suffered from the quarantine – in the US, the S&P 500 index, the Dow Jones, and NASDAQ industrial indexes fell sharply. As a result, the US government had to provide economic assistance under the CARES Securities Act, which resulted in the growth of 7.3%, 7.73%, and 7.3%, respectively (Nicola et al., 2020). Similarly, the German DAX, British FTSE 100, and Euro Stoxx 50 fell and then recovered after agreeing on the aid package; a similar picture was observed in the Asian markets. The downturn in global markets has increased the environment’s volatility and led to critical levels of liquidity. Most central banks have stepped in to soften the economic shock and maintain liquidity. Europe has pledged a 1.7 trillion euros aid package to relax the economic impact on the Eurozone (Nicola et al., 2020). The European Central Bank announced the purchase of assets for 750 billion euros to strengthen the euro currency.
Besides, the European Commission has raised an investment fund to 25 billion euros and eased its fiscal rules policy to encourage state support for enterprises. In particular, in Germany, the State Development Bank will provide loans of 500 billion euros to companies affected by the pandemic. France has given 345 billion euros, Spain 200 billion euros, and Italy 25 billion euros to support the businesses (Nicola et al., 2020). The UK has allocated 330 billion pounds to help all people in financial difficulties and 20 billion pounds in fiscal support for British companies.
The package included a job retention scheme, canceling VAT and income tax payments, aid package and grants for small businesses, and 5 million pounds business interruption loans from British Business Bank. It also introduced a new lending mechanism from the Bank of England for larger firms, a payroll compensation scheme, and support for self-employed persons. Such measures are important for avoiding bankruptcy and maintaining the relationship between employees, suppliers, customers, and creditors (Didier et al., 2020). The instability has led to massive sales of risky assets and purchases of less risky ones. It was expressed in massive US dollar purchases in foreign exchange markets, while 11 of the major currencies lost value (Wójcik & Ioannou, 2020). It is noteworthy that the currency markets’ instability began after Trump announced the imposition of travel restrictions between the United States and European countries.
Nevertheless, the dollar rate quickly returned to its previous levels. From February 20 to March 20, stock markets lost from 30% to 40% in value, but from March 23, they began to rise again (Wójcik & Ioannou, 2020). It should also be noted that developing countries’ markets suffered greater losses than the markets of developed countries. In particular, investors withdrew more than $ 83 billion from there, which led to limited loans available to governments and businesses, and reduced economic activity (Kentikelenis et al., 2020). Scholars also point to an unmet need for increased investment (Goodell, 2020). In developed countries, medium and small enterprises were hit by the pandemic, while large businesses were less affected.
As part of curbing the stock market’s fall, the ECB began buying government bonds of the Eurozone countries and decided not to cut interest rates. Besides, on March 15, the US Central Bank lowered interest rates to zero and offered to buy back assets from banks for $ 700 billion (Martin, 2020). At the same time, the US Congress approved a $ 2 trillion stimulus bill (Kentikelenis et al., 2020). The international financial organization – the World Bank – offered assistance to low-income countries in the amount of $ 160 billion (Nicola et al., 2020). Therefore, the pandemic events became evidence of the decisive role of the state and the hierarchical nature of world finance.
Impact of the Pandemic on the Lending Policy of Financial Institutions
Financial risks also include credit risk, liquidity risk, and operational risk. Credit risk is taken into account by banks, which usually have credit risk management units. Credit risk management is aimed at reducing losses associated with non-payment of loans. Typically, credit risk arises when there is a high probability that the borrower will not meet its obligations to repay the loan. Banks rely on reliable customer data to mitigate credit risk and build responsible relationships with their customer base. When it comes to lending to businesses, banks study the risks associated with the investment industry and assess its financial statements and financial decisions. The concept of expected losses is also often used in credit risk management. Further, liquidity risk is associated with the securities’ liquidity and the danger that these securities cannot be sold quickly enough. Finally, operational risks relate to the risks associated with the investment decisions of companies or individuals.
Scientists note that banks become vulnerable in times of economic downturns due to the likelihood of issuing non-performing loans and the danger of the government’s forced withdrawal of funds. At the same time, group lending to microfinance institutions, and lending to the poor are under particular pressure during pandemics (Goodell, 2020). Simultaneously, the population’s concerns are usually caused by how long banks can adhere to conservative credit policy and how they will react to macroeconomic shocks. It is also noted that the pandemic could have a long-term impact on the cost of capital and the financing of enterprises, which are also subject to macroeconomic shocks. At the same time, according to the study (Li et al., 2020), banks passed the test for the possibility of bank liquidity. Therefore states should not expect a decrease in lending opportunities.
According to the study, pandemics increased the number of applications for loans and deposits. Besides, after the 2008 financial crisis, several changes were introduced to the requirements for bank capital. Therefore, banks have an additional opportunity to create a financial cushion. Specifically, academics note that commercial and industrial (C&I) loans rose sharply by $ 482 billion from March 11 to April 1 (Li et al., 2020). At the same time, it is indicated that the growth of lending was due to the use of credit obligations.
Besides, large banks showed a higher level of drawdowns, as this was due to drawdowns of large firms, which usually take loans there. Therefore, C&I lending grew much faster for banks with assets of more than $ 50 billion (Li et al., 2020). Noteworthy, the financial condition of banks before the crisis did not limit their lending. The rapid growth of loans was caused by the pandemic and was carried out based on loan obligations. Besides, before the crisis, banks were financed mainly by stable deposits. However, scientists have noted an increase in banks’ needs for large volumes of deposits and cash, which grew by $ 1 trillion over the specified period (Li et al., 2020). As a result, the scientists decided that, unlike in 2008, the bank capital did not limit lending possibilities. It was also concluded that asset liquidity did not significantly impact the volume of lending to large and medium-sized banks and had an insignificant effect on small banks.
Scientists also noted the uncertainty caused by the pandemic regarding dangerous debts of various sizes. In particular, the need was noted for banks to revalue their lending assets and update their expected risk models to reflect future macroeconomic and financial events (Barnoussi et al., 2020). It was also suggested that attention should be paid to the fact that states are faced with the economic recession, rising unemployment, and consumer confidence, in connection with which governments have implemented many interventions in the economy.
A Bank that Affected the Crisis
According to the research presented above, US banks remain a reliable source of lending to households and businesses. Besides, in all likelihood, the pandemic did not have a damaging effect on the global banking system. The reason for this stability may be the adaptation of improved financial state legislations among the countries affected by the financial crisis of 2008. Moreover, many banks are now pursuing a policy of supporting the population and SMEs. Barclays, one of the largest financial conglomerates in the UK and globally, which has offices in Europe, the United States, and Asia, announced the launch of a package of financial assistance of 100 million pounds. The bank has provided financial services, overdraft to more than 650 thousand SMEs, waived many commissions for clients and is helping to implement government support schemes (Barclays launches £100 million COVID-19 Community Aid Package, 2020). Besides, three bank executives donated a third of their fixed salaries over six months.
The bank offers services to businesses such as Bounce Back Loans (BBLs) – for small companies and Coronavirus Business Interruption Loan Scheme (CBILS) that gives up to £ 5 million credits to SMEs. The bank also implements the Coronavirus Large Business Interruption Loan Scheme (CLBILS) with loans of up to £ 200 million for businesses with turnover greater than £ 45 million (Barclays launches £100 million COVID-19 Community Aid Package, 2020). Noteworthy, Barclays also offers broader support for UK local businesses.
Conclusion
Thus, it was explained how the pandemic affected the financial risk position and lending policy of the financial institutions. Besides, a specific bank case that affected the crisis was provided. It is noteworthy that the developed economies’ governments managed to cope with the pandemic through financial regulation and the Central Banks. Despite concerns, commercial banks withstood the liquidity stress test and showed good lending opportunities. Moreover, many banks, such as Barclays or Bank of England, are involved in government support policies for individuals and small and medium-sized businesses. Therefore, individuals and enterprises can further rely on loans from financial institutions. Besides, banks’ financial stability will help overcome the pandemic’s economic impact and positively influence stock markets’ strength through lending to big companies.
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