Challenges of the banking sector after the covid-19 crisis

The covid-19 crisis will come on top of the pre-crisis challenges of the traditional banking business model: revenue pressure and low profitability (low levels of interest rates and higher levels of capital), tighter regulation (after previous financial crisis), and increasing competition from shadow banks and new digital entrants. 

In this second report of the “CEPR/IESE series on The Future of Banking”, the authors offer an in depth analysis of the international banking sector.

One of the main ideas of the study is that the banking sector will be under stress due to high levels of credit losses once large-scale insolvencies arise between corporates and households due to the global economic downturn caused by the covid-19 crisis.

This will happen despite the fact that the sector initially enjoyed a positive momentum during the pandemic, channeling the flow of credit and public guarantee loan programs to the economy, and enjoying flexibility measures by regulators and supervisors.

Among many other relevant issues, the report pay much attention to the digital disruption, as one of the pre-crisis trends that will be much more accelerated after the pandemic: “Digitalization will receive a large impetus, with new entrants challenging banks”. This situation provides many benefits, but also new risks that will require regulatory responses, and crucially will require a level playing field between incumbents and new entrants. 

The authors consider that “Digital disruption poses a formidable challenge to regulators, which must adapt by balancing facilitating competition and allowing the benefits of innovation to pervade the system with protecting financial stability”.