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FEATURE

Can Banks

weather this storm?

he novel corona virus (“COVID-19”) pandemic Diversification and key challenges for mid-sized
has had an unprecedented impact on the banks
Tglobal economy that may eventually surpass
In these circumstances, diversification of revenues
the impact of the 2008 global financial crisis. The drop that includes fee income is of utmost importance. The
in global interest rates in response to COVID-19 and a large international universal banks tend to be well-
low oil price environment has resulted in GCC banks diversified across investment banking, wholesale
facing two simultaneous economic challenges. This and consumer lending as well as asset and wealth
impact coupled with a negative view on the economic management. But many smaller or mid-sized regional
indicator in 2020 is clearly reflected in the results of banks are less diversified. The challenges from the
GCC banks as they have continued to build their crisis is also impacted as the recovery process is
loss allowances during the first two quarters of 2020.
prolonged due to the impact from production and
During this period, the GCC governments and distribution in the vaccination supply chain. The
central banks also announced various economic crisis has also given rise to new risks including
support measures including payment holidays for Environmental, Social and Governance risks, cyber
borrowers and targeted liquidity support for banks. risks, and data privacy risks. The pandemic is also
To maintain stability in the banking sector during applying pressure on Fintech and challenger banks-
such unprecedented times, some regulators have as they will be unable to differentiate themselves
also provided specific relief from capital norms and by paying higher interest rates in the close to zero
certain accounting guidelines. environment, while there could also be a ‘flight to
safety’ as customers begin to place deposits with
In such challenging times, banks have a fundamentally large established players instead.
important role to play. This begins with central banks
and then ripples out through economies via the Measures taken since the global financial crisis
banks themselves as they provide funding liquidity should allow the sector overall to “weather the storm” .
to support businesses and individuals. Specifically, the tougher capital requirements that
have been introduced and the stress testing regimes
Globally and locally, central bank actions have that regulators have implemented allow the banks to
taken decisive and significant measures to mitigate withstand a crisis much better than 10 years ago. The
the impact of these challenging times. The Federal crisis has also facilitated a boost to the new breed
Reserve (Fed) in the US has slashed interest rates of digital banks, which are significantly leveraging
by a full percentage point to effectively zero and the current market conditions to be able to offer
launched a US$700bn package of quantitative easing new products and services in relation to customer
(QE). There has also been a deal between six major experience beyond the capability of the traditional
central banks including the Fed and the ECB to ‘brick and mortar’ banking model.
lower their rates on currency swaps to help financial
markets function normally.
These measures set the context in which banks can
better support their customers. It won’t be an easy Reference
ride ahead. Many businesses are likely to face severe https://home.kpmg/bh/en/home/insights/2020/04/can-banks-
difficulties in the coming weeks and months, and life weather-this-storm.html
will get tougher for the banks too. But the right steps
are being taken by regulators and banks to bolster Responsibility for opinions expressed and the accuracy of facts
the system and help stabilize the situation. published in this article rests solely with the author.
26 Bahrain Banks Directory 2021