This Time It’s Different for Financial Services
One of the most glaring differences between the 2008 financial crisis and the one we’re in now is the relative strength and economic and social roles being played by financial services companies. What is striking is not only how much stronger and safer the financial services sector has become, but also the opportunities available to help people and businesses on the road to recovery this time around.
Note how the federal government is relying on the sector to get funds flowing into the economy. The $6 trillion and counting that the federal government has thrown at this pandemic is many multiples of the stimulus and bailouts of the Great Recession. Banks and credit unions are the conduit for doling out loans to small businesses under the CARES Act Paycheck Protection Program. The Federal Reserve tapped giant asset managers to help it buy up corporate debt and keep the bond markets functioning so that businesses are able to raise cash to get through the downturn.
Then there are millions of people who are fearful about stock market volatility and the implications for investment and retirement portfolios. The financial services sector is uniquely positioned to give individuals and institutions advice, products and strategies to help rebuild their portfolios, protect future risk and align their investments more closely to their financial objectives, personal life goals and increasingly, their values and goals for society and the environment.
Financial services firms and their clients have benefited from Fed activity that has shored up the stock market – leading to what some see as a disconnect between Wall Street and Main Street. To come back stronger, however, the financial sector needs the rest of the economy to recover – their fates are intertwined. The more that jobs come back, small businesses recover and distressed companies and industries are able to find a new normal, and the more corporate balance sheets and household income and savings are restored, the better off the financial sector as a whole will be.
The last crisis was a meltdown of the financial system fueled by excessive debt and risk-taking, whereas the COVID-19 pandemic is a public health crisis that is locking down our economy. “This time it’s different,” has dangerous echoes in finance – but this crisis is different, and so are the risks. Here are three issues financial services firms need to think through to stay ahead in this global pandemic:
1. The bad news and damage are just getting started.
The longer this crisis goes on, the more some of the “temporary” damage we’re seeing now to businesses and jobs will become permanent. As companies go bankrupt, borrowers default and people lose homes and businesses, financial services firms need to consider the social risks around their decisions, actions and tone. Organizations that go the extra mile to help families, businesses and investors—particularly those that embrace digital innovation and solutions—have the potential to make a real difference.
2. COVID-19 will accelerate ESG trends and elevate the urgency of climate action.
The pandemic has presented the world with an immediate and urgent crisis. Suddenly, people are realizing how fragile our way of life is. Financial services firms were already moving towards integrating ESG factors into business decisions, capital allocation, product offerings and reporting. The pressure from institutional shareholders, policy makers and activists for sustainable finance, responsible investing and climate action are likely to intensify rather than recede, as is interest from retail investors, clients and employees. This is both an opportunity and a risk for the sector.
3. We don’t know what we don’t know or how that will weigh on returns.
Most observers agree that massive stimulus is needed and appropriate, but we don’t yet know the long-term systemic consequences of the trillions of dollars of debt being issued by the government and private sector companies—or what happens to asset values if cheap available credit is withdrawn. We don’t know how economic realities and political and social reactions will alter government policies, or who will pay when the bill comes due. We don’t know how long interest rates will be at zero, weighing down returns for segments of the industry and impacting pension funds and retirees for years to come.
What we do know is that financial services leaders have insights from past crises and ways of thinking about the problems that could help us avoid worst case scenarios. Those who are able to read the emerging social landscape—and are willing to lead through their values and actions—will have the most opportunities to come back stronger.