The economic recession of 2008, hailed as the worst economic disaster since the Great Depression of 1929, resulted in a loss of more than $2 trillion in global economic growth. Americans alone lost more than $9 trillion in wealth.
A decade later, another economic slowdown is well underway. There is unprecedented economic activity on a global scale. Amidst the crashing global economy brought on by the Coronavirus pandemic, governments across the world are planning to roll out credits to small and medium-sized businesses, among other financial measures undertaken. Affected nations have started to loosen financial policies in a last bid to save the falling numbers.
The US Federal Reserve recently reduced interest rates by 50 basis points as an emergency measure to fight the effects of the Coronavirus on the US economy. Another emergency cut followed barely two weeks later when the target interest rate was cut to near zero. To put an end to the increasing drop, the US Federal Reserve on March 23, promised bottomless dollar funding. Globally, treasury yields have hit an all-time low in 10 years. Another first in 10 years was the tripping of an NYSE circuit breaker in the beginning of March, when the S&P 500 plunged 7% four minutes into the session.
The US stock market turned from bull to bear for the first time in 11 years.
The International Monetary Fund (IMF) expects the pandemic to send the economy to recession and nations are working on action plans to tackle it.
So where does the banking sector come in?
The global banking sector took a massive hit a decade ago, with recovery being painstakingly slow. Now, there's another storm blowing across the globe and its aftermath is yet to be revealed.
Even the most well-understood financial products can behave unexpectedly due to a sharp change in the economic environment. In the last great recession, it was not just the ability to pay, but also the liquidity crunch caused by complex derivatives that hurt the markets and led to a frozen economy.
Should we be worried?
To an extent, the picture looks gloomy but different industries are preparing for it in their own way. As one of these industries, we, in IT, can only wait and see how the ongoing trade wars (US-China trade relations are still none the better) evolve, how markets search for their bottom line, and how investors can expect higher returns.
So, what has the banking industry learned from the last economic recession? And how can tech service providers support them?
Stay updated on the policies
The Basel Committee formulates regulations to handle cyclical behavior to make it counter-cyclical. In other words, it handles the ability to loosen the credit when markets are good and restrict the credit when markets are bad. When the situation demands, banks will have to be ready with solutions that accommodate these regulatory updates to serve their customers seamlessly.
Timely action/response will be of utmost importance in these scenarios and a ready solution will go a long way in ensuring the bank’s success. IT companies that build solutions for the finance industry must always be aware of all regulations and regulatory changes to best serve their customers’ interests. They have an opportunity to showcase their business understanding and must leverage this by implementing solutions tailored to meet these changes.
Leverage tools in technology
In recent times, the emergence of fintech organizations has provided the biggest disruption in the finance industry. Given the ease with which its processes work, technological integration has become an instant hit with the masses. Although technology is what drives fintech, there is no empirical data to support the probability of default analysis.
Tech service providers can build solutions through analytics-driven models, based on Machine Learning and Big Data. They can create clear segregation using supervised or unsupervised models to prepare proof of concepts or pilots aligned with the business needs. Self-learning algorithms can collect and analyze out-of-sample data to detect patterns and predict default possibilities.
Create a functional workforce
During an economic recession, banks or investment banks would be hard-pressed to time the market, as bond yields would have inverted. This will continue to happen until the markets neutralize.
Tech service providers can help banks by creating a functional workforce – a group of people who understand the operational life cycles of diverse asset classes. The right hiring and training strategy will play a big hand in this. This group can appreciate the financial services domain and also will have a desire to digitally reinvent some of the core banking operations that span across front, middle, and back office. To achieve this, it is important to make timely investments in upskilling and hiring the right talent.
Tech service providers can, thus, provide the much-needed impetus to their banking clients, allowing them to effectively time their products to market and meet end-user requirements.
Withstand the rising tide
Going by the predictions, a perfect storm is forming. When it strikes, history should not repeat itself. Preparation is key, and while the finance industry uses financial engineering to manage risk, banks and fintechs can contribute by designing solutions based on the socioeconomic changes around the globe. The finance industry has foreseen the change coming. The IT industry must now build solutions to support this change and withstand it.