S&P report shows COVID and regulation as key factors in global banking recovery

Banking And Financial Messaging

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John Gaffney

Sep 16, 2021

The global banking recovery is well underway, according to a new report by S&P Global Ratings, but the biggest problem of 2020 continues to threaten in 2021. COVID and its variants still have the potential to disrupt an otherwise largely positive global banking picture.

"The transmission of the delta variant remains a concerning trend in countries which are now seeing an uptick in cases," S&P Global stated. "Effectiveness of vaccines against such variants is deemed significant... we still believe that coronavirus will increasingly be viewed as a chronic, but largely controlled phenomenon, of which society will continue to adapt and respond. As such, the direct impacts on the global economies and energy consumption patterns are seen as diminishing over time."

COVID and the effect of regulations in the financial services business were among the key factors in the firm’s “Global Banks Outlook Midyear 2021:  Clawing Back To Normalcy” report. On a general level, it shows rating trends stabilizing. Negative rating outlooks across the sector have improved from 31% in October 2020 to 1% in June 2021. For the U.S., the U.K., and Australia, recovery is emerging in Q4 of this year and will continue through 2022. Right behind them: Canada, Singapore, Hong Kong, South Korea, China and Saudi Arabia. Digital solutions will be a priority, according to S&P.

“Preparedness and agility to swiftly shift business models to the new digital normal become crucial to deliver on faster-changing client preferences,” the report states. “While retail banking and payment segments have been disrupted for years, we expect the corporate banking, investment banking and asset management segments to see tectonic shifts in digital offerings and market infrastructure, including use of blockchain technology for establishing digital bonds and a token economy.”

The report supported the opportunities afforded by regulators during the pandemic. Regulation worked, it states, as regulators eased rules to spur bank lending by easing capital and liquidity requirements. It also tagged the one-year implementation delay of Basel III capital rules as a positive development. The Basel agreements, which were authored after the 2008 crisis to govern risk management among international banks, have been updated as recently as 2019. The revision for Basel IV is a complex series of new capital requirements and risk management that was set for Jan. 1, 2022 and will now be implemented one year later.

“The impact of new capital requirements under Basel IV is significant, requiring banks to review and adapt all capital-consuming products according to a new framework,” says trade publication International Banker. “One of the most important changes concerns the imposition of standardised models for calculating risk-weighted assets (RWAs) and constraining the use of internal ratings-based (IRB) models. The risk weights under the standardised approach are not simply more stringent than those under the IRB approach, they are sensitive to a completely different set of factors, resulting in significant discrepancies in output.”


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Global Banking S&P Report
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John Gaffney

John Gaffney articulates the vision and strategy of the next phase of business for leading brands and their executives. An award-winning journalist, he has most recently been managing editor of PYMNTS.com, and created B2B content platforms and content for Mastercard from 2014-2018. As one of the original journalists in digital marketing, he has been editor of Mediapost and other newsletters during the industry’s formative years.
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