Question

1) explain how the Covid would affect the major risks of banks and its potential impact on the IRM of banks.

2) Banks are regulated in terms of capital adequacy. Briefly discuss how this requirement would help banks maintain safety during the Covid-19 pandemic.

Answer 1

Answer 1: The Covid-19 pandemic has turned things up side down in the whole world. Every part of the world is fighting this deadly virus. No matter whenever the virus decreases it's effect, but the potential harm which it has caused to the world , both to the lives and the world economy will not easily heal in the coming times.

And banking industry is one such industry which has been worse affect by the Covid-19 pandemic across the globe.The impact of covid on the major risks of banks are as follows:

• Increase in Credit Risks: Due to covid many people have lost their jobs across the globe and turned unemployed. As a result of which many people made their way towards banks in need of funds. And an increase in demand of funds has increased the credit risks in part of the banks. People who has parked their money with their banks were demanding their money back and those who were in need for money in the form of loans etc also made their way towards the banks. Hence it created a double whammy situation on part of the banks thus in turn increasing their credit risks.
• Increase in Liquidity Risks: The situation of the banking industry in terms of liquidity risk is not less different than the situation which was during the Financial Crisis of 2008. However the situation today is even more worse. More and more people are making their way towards banks in need of funds. But the situation on the side of the banks is even more worse. Banks have been facing liquidity issues and these have been increasing since the Covid -19 pandemic. Liquidity issues on the part of the bank have also increased the chances of a bank run and this situation worsen even more with the rising number of bad loans which banks have provided.

When we talk about the IRM of the banks it has also been affected badly due Covid. IRM stands for Interest Rate Margin and when it comes to managing it banks have definitely failed. Covid has caused the global interest rates to decline thereby spurring the demand for funds in the world economy since people anticipate that declining rates of interest are a sign of cheaper credit. Hence the demand for loanable funds have increased and the counter effect of this is that the credit risk and the liquidity risk on the part of the banks have also increased.

Answer 2: Regulating Banks in terms of capital adequacy is of great importance. To maintain a standard level of capital adequacy across all the banks around the world the BASEL Norms were implemented and they have been working quite well. Time to time changes in the norms are made to make sure that need of capital adequacy are met with the changing times.

The requirement of capital adequacy would help maintain banks safety during the covid 19 pandemic to a very great extent. The reason for maintaining capital adequacy is because if the banks go through any tough times or when risks on the part of the banks both the credit risks and the liquidity risk increases the capital buffer which the banks maintain can be used to survive during these tough times. When the liability of the banks increases and the bank is running is running short of funds it can use the capital which it has been maintaining, in such situations and can get out of trouble.

Another type of capital adequacy that banks maintain is counter cyclical capital buffer. The reason for the same is that if during an year there arises such a situation that banks are short of funds then this capital buffer acts as a tonic during such tough times and hence banks get out of some troublesome situations at ease. Capital Adequacy is like preparing yourself for the worse in order to loosen it effect. and capital adequacy has definitely acted as a boom for the banks during the Covid-19 pandemic.