How Will the 2020 Crisis Accelerate the Evolution of the Banking System?

An exogenous shock triggered a simultaneous collapse in supply and demand, which coincided with an oil price shock and led to a financial crisis. We compare and contrast the COVID-19–related Financial Crisis (CFC) with previous shocks. Policy responses included the traditional toolkit of lower policy rates, more flexible rules on loan loss provisioning and capital rules, injection of liquidity through direct lending and asset repurchase, and expanding public balance sheets, among others. Banks implemented their own response to the crisis by tapping into funding lines to increase their liquidity cushions, offering loan forbearance, and serving as distribution agents for government subsidies. Capital markets played their role via record-high levels of debt issuance and convertibles. The CFC will accelerate trends that were visible in the financial industry. From branch closures to a rise in contactless payments and the growth of super apps, the health crisis is leading to new practices by financial institutions, being a catalyst for digital banking. Moreover, it is impacting the demand for financial products, with a rise in demand for insurance protection and increased interest in sustainable investment strategies. Accelerated digitization and sustainability represent the dual impact for the financial sector, while at the same time paving the way for opportunities.