Four Elements of a Post-Crisis Operating Model for Financial Institutions

5 min readSep 14, 2020

By: Jacqueline Maduneme

The adverse human and economic impact of COVID-19 on businesses has been significant. While the financial services industry has successfully navigated the immediate pressures of the pandemic, this rapidly evolving situation exposed existing operational weaknesses and just how unprepared we were to respond.

As the immediate threat of the pandemic slowly eases, rather than returning to business as usual, banks should make an effort to refine core operational strategies. COVID-19 is not a one-off challenge. While it is difficult to predict what will happen next, it is safe to assume we should expect additional waves of this epidemic in the near term.

Unlike natural or technical disasters, malicious acts, or terrorist events, the impact of a pandemic is much more difficult to determine because of the difference in scale and duration. The key goal in managing any dynamic and unpredictable challenge is resilience — the ability to survive and thrive through unpredictable, changing, and potentially unfavorable events.

Looking ahead, banks should focus on the following four key areas to continue to help their customers rebuild their financial security while improving their own efficiency and resilience.

Business continuity plans.

The COVID-19 pandemic has brought fast-moving and unexpected variables, some of which existing incident management plans and teams were not prepared to handle. As banks stabilize and shift focus on how to bring people back to work, they should look to insights gleaned from current crisis response efforts and identify areas for real-time corrections.

Business continuity plans should address the impact of COVID-19 on the continued delivery of critical financial services while protecting growth and profitability. The strategy should be documented and scaled to the phases of the outbreak, such as the six intervals described by the Centers for Disease Control and Prevention (CDC).

The pandemic issues considered in the impact analysis should involve actions such as scenario planning, forecasting employee absenteeism, more frequent financial modeling exercises to improve resiliency, and new models that incorporate economic impacts of past pandemics.

Digital transformation.

The closure of branches and offices following the COVID-19 crisis forced a shift to digital services, from opening accounts to applying for mortgages. Processes demanding physical signatures now allow digital signing. It is likely customers will have reduced demand for physical channels going forward. The question is, how do we keep customers on digital platforms while delivering personalized experiences through digital channels?

To drive adoption and sustainability, banks must consider customer experience, digital access, and digital literacy, especially with vulnerable customers, those without digital access, and those that lack digital literacy. Accessibility is an area which will garner regulatory scrutiny.

Turning to banking operations, the response to COVID-19 has put enormous pressure on banks’ operating models, as many have extended their credit lines and continue to distribute various government stimulus packages to customers. Additionally, many banking employees worked from home during the lockdown (and continue to work from home), with technology sustaining critical business activities from trading to financial advisory services.

This real-live stress test has identified gaps in the IT infrastructure, particularly with processes that are manually intensive. This offers banking leadership an opportunity to challenge themselves and ask how they can achieve higher process automation across the bank. As the immediate crisis fades, banks should not revert to business as usual, but prioritize investment in end-to-end modernization to automate key processes, creating efficiency gains and strengthening resilience.

As we get used to new ways of working with colleagues and interacting with customers, redesigning the control environment will be a key component of the post-crisis operating model. Banks will have an opportunity to embed preventative, automated controls as they modernize and automate processes.

Credit risk and liquidity management.

During this period of economic uncertainty, managing cash and liquidity positions is crucial. Financial firms filled (and continue to fill) an enormous credit gap during this pandemic through granting forbearance and greater access to loan facilities to customers. Banks also played a crucial role in distributing various government stimulus packages.

Banks are now experiencing a growing tension between supporting their customers and increased concerns about the rise in non-performing loans (NPL), which will lead to a weak capital position. Banks worldwide have taken a hit from COVID-19-linked loan impairment charges. According to BBC News, July 14, 2020, three major U.S. banks reported that they put aside a total of $28B in loan loss provisions in Q2 2020 amid concerns about customers defaulting on loans due to the pandemic.

To allow for more efficient risk management, banks should rethink their credit risk policies, credit risk models, risk tolerance levels, and key risk indicators across their lending portfolios. Risk management considerations should be reflective of economic changes, and greater attention should be afforded to more challenged customer segments.

Banks should also model worst-case scenarios to assess the impact on cash positions and revise often, identify the financial and operational sources that can be tapped to conserve and generate cash, and understand and plan for the regulatory and financial reporting considerations that will result from COVID-19.

Workforce.

Remote working has shown there are other ways of operating and this will have permanent implications for how employees think about their work, no matter what industry they are in. And, notwithstanding new areas of operational risk, remote working has been surprisingly effective in the financial services industry.

Banking leaders must take this opportunity to reassess how their people can perform successfully beyond this period of uncertainty, because the banking workforce will not fully come back to the same situation they were in pre-pandemic.

In assessing the potential return to the office, banks should evaluate what is critical, what is possible, and what is safe. To optimize remote working for the long-term, banks should identify and evaluate emerging issues around productivity and risk and consider how to maintain and drive sustainability.

While challenges such as extending cyber-security measures and controls to employees working from home may be overcome, there are concerns around potential breakdown in risk culture, on-the-job training, monitoring and governance, performance management, and risk management over time. It is unclear whether instant messaging and video conferencing will be sufficient substitutes.

Third-party service providers.

Relationships with third-party service providers should also be an area of focus. The disruption of the pandemic exposed the degree of third-party risk that many banks have, especially around business process outsourcing arrangements in low-cost jurisdictions.

Banks can begin to mitigate their third-party risk, especially with respect to concentration risk, by identifying alternative third-party relationship scenarios, taking into consideration cost, service, and resilience. Third-party risk management is an area which will continue to face regulatory scrutiny.

The pandemic has impacted every industry, economy, and society. These impacts will have a mark on how financial services evolve beyond the crisis. We must brace ourselves for continued turbulence and uncertainty. But we must grasp the opportunity to improve how we serve customers, while improving our own resilience and efficiency.

—

Jacqueline Maduneme is the CEO and Founder of Compliance Core, a risk management consulting and technology solutions firm for small and mid-sized organizations.

Originally published at https://www.ellevatenetwork.com.