How Banks Are Managing Risks During the Pandemic

December 1st, 2020

This has been a challenging year for the finance industry. Financial establishments, such as banks, were forced to alter business procedures and operations with urgent immediacy when the crisis gained momentum. To do this meant a rise in uncertainty, as banks were forced to accept more risks.

Operational risk is associated with a failure in the operations of a financial institution, and can be traced back to failed or inadequate processes, management, or employees, or losses due to fraud or system failures. When wellness became a priority, banks had a sudden shift to a remote workforce, and operational resilience relied heavily on technology. Digital transformations which were originally planned to take several years happened in several weeks. This includes the launch of online banking capabilities so customers can manage account activities remotely. The adaptation of an omni-channel presence required banks to train staff in new capabilities, be they at the branch office, call center or operate online. Online work proficiency includes cybersecurity and cyber-hygiene. Banks have always been aware of security risks, and with the sudden shift to digital channels, hackers, identity fraud, and phishing emails will remain a concern.

Operational risk also includes transparency between banks and employees, and employees and customers. As remote work continues, bank leaders worry about the erosion of company culture. Things have panned out well so far due to the relationships banks had prior to the crisis; but moving forward, banks will need to find ways to form and reinforce new relationships, not only in the workforce but also with customers. Regularly surveying employees for feedback and recognizing trends in customer care will help banks reconsider management styles to prevent feelings of isolation and streamline daily processes.

Compliance risk is related to those legal penalties a bank faces should it fail to follow the regulatory standards put down by the industry. New operating procedures and customized banking services can put banks under scrutiny. During and after the crisis, banks must check with proper legal counsel to ensure company changes are in compliance with industry terms but also satisfy client needs in a fair, ethical manner.

Credit risk is the potential for borrowers to default on their obligation to a bank. This is the most significant risk banks face, and if the economy enters a recession, there will be a surge of debt defaults. Many companies and customers will be unable to pay back their loans, and banks will suffer huge losses. This, of course, is a financial risk. Bank support for customers during the crisis has taken many forms, including easing the policies for collections on negative balances, deferred payments, and overdraft fees. Concerns rise though as more customers ask for credit, and banks are forced to be more lenient in how they define financial hardship. Some of the world’s largest banks have prepared for worst-case losses by setting aside substantial reserves in loan loss provisions. Smaller banks, however, are unable to take such preventive measures and may not fare well if conditions worsen.

While mechanisms are in place to manage risk, and thus minimize the negative effects risks can have on the productivity, financial health and overall reputation of an institution, it has taken a great deal of effort by global financial leaders to navigate the ups and downs of the crisis and still serve customers. Risks can cripple a business, and while institutions have done well so far to monitor risks under pressure, it is necessary that risk models plan for a long-term duration of the crisis, since its end is nowhere in sight.

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