Impact of Covid-19 on the financial Institutions
Introduction
Many nations around the world are on the verge of an unparalleled pandemic illness, and they go on lockdowns to stop the spread of the novel coronavirus, which is also referred to as “Covod-19.” The world economist believes that the world economic shutdown due to the pandemic is the main determinant of the stock volatility that might lead to the prime stock market crash in this 21st century. Historical, two similar episodes that are the Spanish Flue of 1918 to 1919 and the Black Death of 1347 to 1351 brought about widespread short-term, considerable and adverse consistence severe financial disruption for the economic development and growth. Within the financial market context, Covod-19 impact is showed the first two months in the year 2020 in countries such as China. For example, the capital market materialized tends to increase the uncertainty leading to the financial market’s validity. Transpiration, retailing, and energy industries experienced huge losses, including the healthcare sectors. Due to the coming economic shock, central bank of nations such as china announced an interesting package of $174 billion that supports the financial systems and the economy at the beginning of February. Although Black Death and the Spanish Flue are two crises that affected the economy vastly, the impact of Covid-19 has been investigated and discovered to greatly affect the financial sectors in the world because it has led to economic shocks in the capital markets and banking sectors.
Literature Review
The rare and unforeseen events subjected to the wide market methodical risks tend to influence the investors’ behaviors. Based on the self-fulfilling beliefs and the arbitrary assumptions, the total macroeconomic behaviors of financial institutions, banks, and forms set off the reaction chains that trigger the international capital flow’s reversals, which adversely affects the jumps to the multiple equilibria and the macroeconomic fundamentals.
Lockdown across the globe to prevent the spread of the pandemic has stopped many economic activities in many sectors such as financial institutions and banks. For example, the companies that have eventually stopped working due to the pandemic tend to miss out on the revenues hence making them unable to pay the loans similarly to households that have lost their job and have less income which will affect the banking capital and profits. Singh and Bodla (28) noted in their article that the Covod-19 pandemic and imposed threats to the small and medium enterprises, resulting to loans worth 2.32 core of the MSME to be at high risks and the same of the micro businesses loans to become non-performing loan that affected the banking sectors greatly. Similarly, the pandemic has caused the banks to face increase demand for the credits and the deterioration of the asset quality in all the private banks within countries such as India.
Research indicates that the Covid-19 pandemic has also affected the financial institutions since the traded financial instruments and bonds have lost their values which has led to further loss for the banks. The articles also indicate that the stock has also experienced value erosion that has affected the economy. For example, in March 2020, the Nifty Bank in India benchmark index has alarmingly dropped. Furthermore, the pandemic has caused the banks and financial institutions to face very low non-interest rates revenues because of low demands of their own different services. For instant, since the outbreak, there has been fewer transactions and payments that are been conducted with few security problems and very low economic activities by enterprises that decreases the fee income for the investment banks. Similarly, research shows that lower capital buffers and losses within the banks might have spillover effects that makes the financial institutions solvency positions to be worse and also undermines the wider economy
Furthermore, the lockdown as a result of the covoid-19 has greatly affected the stock market performance that has led to negative effects to the nations financial sectors. Research by Anh and Gan revealed that there has been a fluctuation in the stock market because of the pandemic, which have brought about economic losses in the market. The article suggested that the effects was due to the increase number of death and confirmed cases of the Covid-19 in the country. For instant, in February, the China Stock market developed the highest standard deviations, and in the United States, they witness an increase in the standard deviation. It was due to the impose restriction but the government to reduce curtail volatility, protect market stability and prevent market crash risks. Hence affecting the stock markets of listed 723 companies in Vietnam greatly during this period of the Covis-19 pandemic. The authors Gormsen et al. (588) further indicated that the Covid-19 has impacted the countries growth expectation and stock prices. The authors research indicated that there has been a drop in the market to 30% and a decline in the global stock market by 10% from the country peak by 18th march 2020 because of the Covid-19 pandemic which forced the governments to impose some restriction on the travel sectors especially high lockdowns in the European Unions. Furthermore, research has proven that the Covid-19 has affected the banking sectors through the bank stock prices. Demiurgic et al. shows that the performance of non-banking institutions and banks begun to worsen in thethe middle of February 2020 because of the outbreak. The financial firm’s stock process and the banks dropped from 70% to 60% by late march 2020 due to rise cases of Covid-19 that lead to shutdown of institutions and business and lockdown.
An article by Fernandes emphases on the Covid-19 economic impact on countries and the industries. The research argues that there has been a decrease in the consumer spending due to the pandemic. It is because most of the people went unemployed and lost some of the revenue that we’rethey receiving, decreasing their spending powers affecting the country’s economy. The author further clarified that many nations faced huge cancellation of the sporting events and also bans on travelling and prohibition of gathering that tend to bring revenue to the country. For example, there was a huge decline of about 90% of the global travel and hospitality industry that continued highly to the economy. Research also indicated that there has been a fall of about 80% of the price share due to the outbreak of the pandemic. Mogaji (60) also found similar response regarding the impact of Covod-19. His research concluded that the emergency of the Covid-19 has led to the sizable world outbreak where people within the industrial sector have become unemployed, leading to financial vulnerability. The impact of the pandemic has been experienced throughout service, retail, entertainment, and food industries, causing the firm to be completely shut down. The article also indicates that the financial vulnerability has forced many banks to give payment holidays on the mortgages and loan deferrals as the short-term that would support the vulnerable consumers.
Other scholars such as Wojcik et al. (388) indicate that financial institutions like insurance and banks are the second firms to be affected highly by the pandemic with a fall of about 27%. It is an aspect that has accelerated the banking digitization which affects the retail banking more as compared to the wholesale sectors of the enterprise like investment. The pandemic has also affected the consumer behaviours where the consumers have been forced to use the online banking, giving branches and ATMs to miss on the transaction costs. Additionally, it has been discovered by Mohamed there are short-term and long-term effects of the pandemic on market index. The finding of the research shows a strong and statically relationship between the Covid-19 pandemic and conventional stock market index performance. the article indicates that there is an increase in the number of the financial volatilities with the increase in a number of the affected nations with the pandemic. For example, there was a decline in the stock returns of the Chinese market because of the increase in the uncertainty in economic policy that is caused by Cold-19 pandemic. hence indicating that the pandemic has led to the cumulative drop in market value by about 1.15%.
Furthermore, the author argues that if the pandemic continues for a long period of time, there would be low interest rates that is close to zero or negative that would put more pressure on the profitability of the banks and financial institution. Secondly is that digitalization trends may rise even further as personal interaction between clients and banks carry high cost and social distancing becoming new norm for the people. it might lead to closure of some of the branches and also stronger reliance on internet banking and telephone. Finally, the research shows that the pandemic strengthens competition for the banks from the financial technology firms, especially the Big Tech Companies like Amazon or Apple. these companies might come up strengthened in the middle of the pandemic that might put more competitive pressure on financial institutions and banks in their main business lines.
Strengths and Weaknesses
The article by Singh and Bodla (28), has its strengths, such as providing data about the impact of the epidemic on the financial sectors and also acknowledging to borrow works from other authors. Moreover, the authors have not listed and research approaches that were used. Anh et al article has used other scholars past research in order to support their arguments and also listed the research approaches that were used. Similarly, to an article written by Emmanuel who used other sources, however, the author did not include any research methods. in other words, all the used articles in this review tend to use other sources for their arguments making the information to be more credible and reliable. However, all the articles did not include ways or approaches the financial sectors might adopt to overcome the crisis or manage the pandemic to ensure the effect is not immersed. For this reason, further research is required for readers to understand what financial sectors need to focus on to reduce the pandemic impact and would serve as the guide for manager in financial institution
In conclusion, the text provides a literature review on the impact of Covid-19 on the financial sectors. The authors of the articles argue that the pandemic brings about a negative impact on the financial sectors in various ways. For instant, it tends to affect the Banks and financial institutions in various ways that lead to economic downfall, first is that the pandemic leads to deterioration of the quality of assets and credit growth in all the private banks. Secondly, is that the lockdowns placed has affected the stock market performance in the country affecting the financial institutions. The pandemic has also brought about financial vulnerability for the individuals, companies, and nations across the world. Finally, Covid-19 pandemic affects the stock prices of the institutions and leads to a decrease in consumer spending. The strengths of the articles is that they use other credible sources to support their arguments, and others also showed the research methods they used. Moreover, there was a gap in all the articles, where they did not provide strategies companies need to use to reduce the impact of the Covid-19. Hence further research needs to be conducted to provide those approaches that would serve as a guide t the managers of the financial sectors such as banks.
Work Cited
Anh, Dao Le Trang, and Christopher Gan. “The impact of the COVID-19 lockdown on stock market performance: evidence from Vietnam.” Journal of Economic Studies (2020).
Demirgüç-Kunt, Asli, Alvaro Pedraza, and Claudia Ruiz Ortega. “Banking sector performance during the covid-19 crisis.” Demiurgic-Kunt A, Pedraza A, Ruiz-Ortega C. Banking Sector Performance During the COVID-19 Crisis. World Bank Policy Research Working Paper 9363 (2020).
Fernandes, Nuno. “Economic effects of coronavirus outbreak (COVID-19) on the world economy.” Available at SSRN 3557504 (2020).
Gormsen, Niels Joachim, and Ralph SJ Koijen. “Coronavirus: Impact on stock prices and growth expectations.” The Review of Asset Pricing Studies 10.4 (2020): 574-597.
Mogaji, Emmanuel. “Financial vulnerability during a pandemic: insights for coronavirus disease (COVID-19).” Mogaji, E (2020): 57-63.
Sherif, Mohamed. “The impact of Coronavirus (COVID-19) outbreak on faith-based investments: An original analysis.” Journal of Behavioral and Experimental Finance 28 (2020): 100403.
Singh, Jitender, and B. S. Bodla. “Covid-19 pandemic and lockdown impact on India’s banking sector: a systemic literature review.” COVID-19 pandemic: a global challenge (2020): 21-32
Wójcik, Dariusz, and Stefanos Ioannou. “COVID‐19 and Finance: Market Developments So Far and Potential Impacts on the Financial Sector and Centers.” Mindshift over economists en social geography 111.3 (2020): 387-400.