For the first time in over a decade, banks are starting to see interest rates rise again. While that rise is expected to keep to a modest 0.5% or less this year, it means potentially large changes for the future. The trends spurring those increases are also important. For example, inflation, pending decreases to COVID-19 support for organisations, pending stabilisation of the economic impact of the COVID19 pandemic, and ongoing rumors that the ECB intends to end quantitative easing. And that has strong implications for banks.
With that in mind, the team at ACE has put together a series of questions banks should ask themselves.
After repeated uncertainty, how can banks remain stable while looking forward?
As economies find stability in either long-term plans for coronavirus or new clarity in regulations, banks can return to better and more stable predictions as well. That, plus the ECB’s diminishing of quantitative easing is resulting in a situation that, in the long term, might look more like the pre-2008 one. However, there is a transition to get to that point.
How do you transition to a situation that is more stable, where you can predict for a period that is greater than a few weeks or months? Do you have to focus on organisational resilience? Or do you have enough capital that you can take on larger risk to potentially gain more reward? What will you do with non-performing exposures which built up during the pandemic? How can you account for exposures that might become non-performing as those organisations possibly go bankrupt? How will you account for that instability as part of a longer-term plan?
Here, one of the most pertinent questions remains your risk-appetite strategy. What are you willing to take on as a risk and for what reward? The focus should be on creating a strategy to ensure stability, so you can take on that risk.
How can banks remain profitable in times of uncertainty?
The shift in interest rates also gives rise to questions surrounding the potential for expanding to new products and services. While interest rates won’t rise enough to be impactful in 2022, now is a good time to assess future demand and potential.
For example, if interest rates do rise, can you use that as an opportunity to offer products and services which are impacted by interest rates? Does doing so result in increased profitability to offset uncertainty?
On the opposite side, to reduce costs, banks need credit risk monitoring and early warning processes in place to ensure continued profitability. For example, do you have a way to monitor exposures to predict when clients become a risk? Or do you have processes in place to monitor deviations so that you can reduce losses when they do?
How can banks remain ‘socially responsible’ in times of uncertainty?
As the financial environment shifts, banks are faced with opportunities to leverage rising interest rates for social responsibility. Do you have policy in place to keep focus on sustainability risks rather than (only) credit risks in the context of non-performing exposures? And, is there policy in place to leverage rising interest rates to stay lenient to clients while issuing additional exposure to clients who might need it to navigate the pandemic? How will you find the delicate balance between being lenient and collecting debts in case of non-payment?
Similarly, what will you do with increased interest rates? Will you raise deposit and savings interest rates to give a percentage of profits back to your clients? Or will you keep the increased profit to ensure sustainability for the bank or to create the possibility of new products?
As we invest more in social responsibility, it becomes more important that we do use margins to support non-performing exposures or to give more back to savings, but how much and in what contexts?
At ACE, we’ve spent time thinking about these questions and how we can help banks answer them and to cope with the issues ahead. If you’d like to discuss these, or other problems with us, we can help with an open discussion or tailored advice. Feel free to reach out to us at any time.