The outbreak of COVID-19 has become a global issue and last for more than one year. The COVID-19's impact on individuals, communities, and organizations continues evolving. Analyze risk implications of COVID-19 potential for the banks and financial markets and provide possible strategies that can be used to manage the risks related to COVID-19.

Essay Requirements:

The minimum number of words is 1500words

 

Answer:

The Covid-19 pandemic started in Wuhan China in the year 2019 and spread rapidly to all parts of the world. Many deaths were recorded all around the world. The pandemic affected every country in the world and forced governments to institute measures to curb its spread. Boarders were closed, flights were grounded, schools were closed, conferences were canceled, people worked from home, retail shops were closed and many other measures. The consumption behavior of people were determined by the effects of the pandemic. People rushed to shops to restock essential goods and did not even care about the brand they were consuming provided it was able to meet their needs. Business activities were greatly impacted and the financial institutions and the financial market were not spared. Financial institutions include Banks, savings and loans, finance houses, microfinance institutions, investment banks and the likes. The Financial market is place(not physical) where buyers and sellers of financial instruments meet to trade. The impact of the pandemic on financial markets and banks were very huge. 

Financial markets play a very critical role in the economy. The financial market directs the flow of capital in the economy. In directing the flow, they facilitate the movement of funds from the surplus unit to the deficit unit. These fund flows help the economy to functions and ensure the production of goods and services. The Banks on the other hand is an intermediary institution that plays in the financial market. They issue financial instruments and also mobilize savings from households and institutions and invest in the financial market. The financial market, institutions and financial instruments constitute the financial system. 

For Banks, the pandemic has greatly affected their operations, revenue, cost, loan book, trading strategies and so on. With their operations, to avoid the spread of the pandemic, fewer people are allowed into the banking halls and some branches need to be closed down. This can be mitigated by using digital channels to deliver banking services to their clients and reduce the number of working hours in a day.  Banks have also been affected badly in their loan portfolio, the pandemic has forced businesses and individuals to default on their loans thereby increasing the volume of non-performing loans of banks. to deal with this, banks to need to access credit clients to know the level of impact the pandemic has on them. There are some businesses which are resilient against this pandemic and granting loans to such businesses and individuals will help minimize the impact of the pandemic on the loan books. Another area is the revenue and cost incurred by the banks. The profitability of banks depend on the revenue they generate and the cost they incur. The net effect is their profit. During the pandemic, they has been a decline for banking services and lower interest rates have also reduced interest income. To manage this risk, banks should identify where the bank incurs the most cost and cut the spending while increasing revenue by concentrating more on non interest income. Banks face the challenge of managing their liquidity. Panic withdrawals have hit the banking system due to the pandemic and the  

With the fall global prices of commodities, interest rates and the restrictions on business activities, businesses are finding it hard to have access to credit and thereby affecting the earning per share of publicly traded companies and share price. The US 10-treasury bond has seen its lowest yield in 2020 due to the pandemic. This has affected the financial market. Regulators have also tightened regulation to safeguard the funds of investors. 

Some of the financial risk faced by Banks and Financial markets include:

• Market risk- The possibility of losses due to factors in financial markets that affects investments in the capital market. The market risk is as a result of movement in stock prices, interest rates, exchange rates and commodity prices. The covid-19 pandemic has caused stock prices to decline, lowered interest rates thereby affecting investments in the capital market. 
• Credit risk- Credit risk is the risk emanating from a borrowers inability to repay principal and interest of a loan granted them. The pandemic has affected businesses negatively and caused them to default on their credit obligations. Banks face credit risk from loans granted borrowers while the capital market faces default on bonds and other debt instruments. Credit ratings have also been affected by impact of the pandemic. 
• Non financial risk- Some risk faced by banks and financial markets are non financial. some of these include cyber risk. 
• Operational risk- Operational risk are losses that arise from fraud, failed internal systems, controls and procedures. Banks have had to streamline their operations in response to the pandemic. They are operating fewer branched, using digital channels and working fewer ours. If theses processes and procedures are not adequate, it might result in losses to the bank. 
• Liquidity risk- Liquidity risk occurs when investors, individuals, financial institutions and businesses are unable to meet their short term obligations. In the capital market, failure by an investor to convert a financial asset to cash is as a result of liquidity risk. When such happens then the market is not liquid. In the financial market, investors purchase financial instruments while the issuers also sell financial instruments. Per the agreement, if the time is due to redeem the investment, the investor should be able to redeem the investment by converting the asset to cash. The pandemic has impacted the market negatively and limited investments into the capital market to make the market liquid. One measure of an effective and efficient financial market is its liquidity. Liquidity restores confidence in the market and lack of it impacts negatively. Banks are nit spared from liquidity risk. Banks mobilize household savings and invest in the capital market. The pandemic has slowed business activities and lowered household income that hitherto was mobilized by the banks. Coupled with the high default on loans, they find it difficult to meet their short term obligations.  

These risk are but a few of the risk that has been brought about as a result of the pandemic. Risk management is a step by step process which include identifying the risk, analyzing the risk, prioritizing the risk, treating it and monitoring.  To manage these risk, certain measures have to deployed. Below are some of the measures to manage these risk during a pandemic:

• Market risk- As stated earlier, market risk affect the entire market. The financial market and banks are greatly affected by this risk. To mange this risk banks to limit their exposure in the financial market. The market is unpredictable during the pandemic and trading strategies of banks should be reviewed. Hedging strategies should be employed to hedge against commodity prices, interest rates, exchange rates and other market risk determinants, 
• Credit risk- To mange credit risk, credit granting procedures should be tightened. Since businesses have different level of exposure to the impact of the virus, banks should have to lend to industries that are resilient to the impact of the virus. Pharmaceutical companies and producers of Personal Protective Equipment (PPEs) have been the highest gainers during these pandemic. Lending to such businesses will help manage the credit risk and limit the the volume of non performing loans. Stress testing should be conducted on individuals and businesses to measure the impact of Covid-19 on their businesses before granting credit.  
  • Non financial risk- Some risk are non financial but have a very great effect on the capital and financial market. An example is cyber risk. to manage cyber risk, there should be a plan in place to deal with the risk. As more people work from home due to the pandemic, there are bound to be security breaches. There fore the staff should be trained, robust technology should be in place and security protocols should be tightened. Some non financial risk culture. Since the pandemic has forced banks and the financial market to adapt to new way of doing things, there is bound to be cultural conflicts. One way to manage this is through effective communication. Properly articulate the changes in the way of doing things for market participants and customers to understand. 
  • Operational risk-  Operational risk can be managed by instituting flexible and remote work. This remote work require some infrastructure. The infrastructure should be adequately put in place. A Covid-19 readiness plan should be developed to foresee any Covid-19 case and how to communicate and effectively deal with it to protect employees and ensure business continuity. 
  • Liquidity risk- To manage liquidity, first identify if there if liquidity crunch and put in place a plan to mitigate it. Capital allocations in trading should be looked at. Trading in assets issued by businesses worse affected by the pandemic is a no no. There should be constant monitoring of net working capital and cashflow forecasting to know the cash needs on the bank and how to dispose of some assets or hold on to some assets if need be. Tighten credit policies to thoroughly assess borrowers. 

Covid-19 has impacted the financial system greatly and continues to impact the system. Banks and the financial market has to adjust to the new way of doing business to protect the bank and its employees from losses as a result of covid-19 related risk.