Study on role of technology in banking sector post covid.

1. Introduction

According to Roman and Tchibozo (2017), there is hardly any other profession that is the
object of as much analysis, attention and fear as banking. Caught during the financial turmoil
of 2008 and 2011, saved and placed under trusteeship, considerably weakened yet essential to
the entire economic and financial fabric, strengthened but shaken, the banking industry will
have to renew itself tomorrow and undergo fundamental changes in order to exist. To
undertake this transformation, banks are developing intentions and initiatives to carry out
their activities successfully and come out victorious and strengthened from the current
movement, especially in a context where the COVID-19 pandemic reigns. This
unprecedented crisis resulting from the coronavirus highlighted the essential role played by
digital technologies.

The spread of information technology (IT) and the digital transformation of financial services
raise a series of theoretical considerations. Many questions arise as the structures of the
banking industry are modified. According to the three-pronged approach to the industrial
economy, structure-behavior-performance, the structure of an industry is dependent on the
behavior of the firms from which performance is derived. The deregulation of the banking
industry and the evolution of banking demand and supply have generated a trend that
accelerates this dissemination process within the industry. This trend has intensified with the
effects of the COVID-19 pandemic which are already being felt. The objective of this study is
therefore to analyze the impact of IT and the digitalization of financial services on the
strategy and operation of the pre-COVID-19 banking sector. We will then consider the
challenges that banks face in the COVID era to manage the crisis as well as post-COVID
issues.

Thus, to understand this IT integration process in the banking industry, it is necessary to first
examine IT in the technology development of banking and define the waves of technological
innovations introduced in banks since 1845 and their evolution up to the digitization of
banking services, or even their digitalization. We will then present the preCOVID-19
transformations resulting from this IT dissemination and digitalization at the level of banks'
strategies, and particularly their impacts on organizational, commercial, and financial
performance. Finally, we will consider the challenges of banking business models in the
COVID-19 era and the stakes to be met by post-COVID banks, the latter being dependent on
the environmental context in which they operate.

1.1. INFORMATION TECHNOLOGY IN THE BANKING TECHNOLOGICAL

TREND

Thanks to innovation, a new world is born characterized by waves of technological

innovations and by the emergence of new products and new structures. Faced with these
changes, consumer preferences are changing, and companies no longer produce to sell but to
satisfy them. To understand the upheavals in the banking sector, it is necessary to study the
context in which these changes are taking place. The objective of this first section is therefore
to analyze the momentum in which this process is taking place.

The Waves of Technological Innovation in the Banking Industry (1845-2002) In what

follows, we present the different waves of technological innovation in banking between the
1845 and 2002, as outlined by Morris (1986) and Quintas (1991).

Banks have come a long way since medieval times, enduring and surviving many crises. The
economic crisis induced by the Covid-19 pandemic may provoke another financial crisis.
This comes on top of the combination over the past decade of persistently low interest rates,
regulations, and competition from shadow (unregulated) banks and new digital entrants that
has challenged the traditional business model. The question is what the consequences will be
for banks. We argue in this report that the Covid-19 crisis will accelerate pre-crisis tendencies
as subdued growth and low interest rates will persist for a long time, and digitalisation will
see a large impetus.

At the end of February 2020, the Covid-19 outbreak progressively interrupted the functioning
of economies across most of the world. The first country outside China to be hit by the
epidemic was Italy, and many others (Spain, France, and the United States among them)
followed shortly thereafter; almost no country has been spared. At the time of writing, the
economic outlook is highly uncertain, as the dynamics of the pandemic and the economic
lockdown intertwine, and exit strategies are tentative and dependent on better and more wide-
scale testing for immunity and on the development of a vaccine. The range of estimates for
the fall in GDP for 2020 is staggering, with double digits for many economies, the prospects
for 2021 are uncertain and, most importantly for the focus of our report, the effects of Covid-
19 on the financial system are difficult to estimate. The Covid-19 crisis has differential
ingredients than the global financial crisis of 2007-2009 and the ensuing sovereign debt crisis
in Europe in 2011-2013. First, it directly hits the real economy, combining huge supply and
demand shocks – the former due to disruptions in the global value chain and the latter due to
demand freezes because of lockdowns. Second, it constitutes an exogenous, global shock to
economies, although the consequences will vary due to the different productive structures and
fiscal positions of each country. It therefore requires different policy responses. A first
objective is to provide liquidity to firms, in particular to those directly hit by lockdowns and
chain disruptions, while at the same time shielding the financial sector from firm defaults, a
new surge of nonperforming loans and the erosion of the capital position of intermediaries.
The immediate aim is to keep the economy in an induced coma during the lockdown but to
avoid a chain of defaults, so that activity can start again without permanent damage to the
productive fabric of society.

The Covid-19 crisis comes at the end of a decade that has witnessed significant
transformation in the banking industry around the world. The business model of banking has
been challenged by three developments. The first is low interest rates, with nominal rates
becoming negative in a few countries in recent years. These low rates are affecting the
profitability of financial institutions, in particular those that are more reliant on maturity
transformation and net interest income. The second is increased prudential requirements,
regulatory scrutiny and heavy compliance costs in the wake of the 2007-2009 financial crisis.
These rules have contributed significantly to enhancing the stability of the financial sector
(seethe first Banking Initiative report by Bolton et al., 2019), but at the same time they have
put pressure on banks’ profitability and lessened their competitiveness relative to shadow
banks. The third development is the massive application of digital technologies and the
emergence of new competitors. While these have improved the efficiency of incumbent banks
and allowed new products and services, they have favoured the entry of new FinTech firms,
as well as BigTech players in banking-related activities, in competition with traditional bank
business models – in particular in the area of payment systems.1 The Covid-19 crisis will
accelerate pre-existing trends in banking, most significantly the extension of the low interest
rate period and the impact of digital technology (including digital money as cash is used less
and less), as well as the importance of IT investment, with the move from the bricks-and-
mortar branch model to the mobile phone apps ecosystem accelerating. The crisis will push
for further restructuring of the sector, with consolidation in potentially more efficient
institutions. The Covid-19 crisis leaves open many questions, such as whether shadow banks
will continue to grow their share in financial intermediation or whether incumbent banks will
benefit instead. Another question is whether BigTech platforms will emerge the winners in
the quest to dominate financial services – the market capitalisation of BigTech (Microsoft,
Apple, Amazon, Google, Facebook, Alibaba, Tencent) already dwarfed that of the large banks
(JPM Chase, Bank of America, Industrial and Commercial Bank of China, Wells Fargo,
China Construction Bank, HSBC) before the Covid-19 crisis.

1.2. Wave of Technological Innovations

1.2.1. The First Wave of Technological Innovations

This first wave began in 1846 when the telegraph was first used by the banking
industry. This first wave of technological innovation only had a limited effect on
“front-office” procedures. It mainly concerned internal changes since transactions
between the banking institution and the client remained unchanged and a single
channel was used: the branch. At the beginning of the century, back-office functions
were limited to processing checks and drawing up balance sheets of cash transactions.
And as the volume of financial transactions increased, the need for mechanization
arose. The introduction of numerous machines at the back-office level improved the
working conditions of the employees and contributed to increased productivity in the
branches. The use of these machines was not really effective until the 1950s, which
explains the phenomenon of the extension of branch networks. These changes led to
the emergence of numerous performance indicators that measure growth in size based
on revenue per employee, transaction efficiency i.e. profitability and credit-related
risks.
1.2.2. The Second Wave of Technological Innovations
This second wave began in the late fifties and lasted until the end of the eighties. It
was marked by the introduction of IT in the financial sector to cope with the growth in
transaction volumes. The first experiences with the use of IT in banking took place in
1984 in the United States. This period was characterized by a significant
dissemination of hardware but much less so of software. During this phase, the
primary objective of financial institutions was to reduce the costs of administrative
tasks resulting mainly from check processing. The idea therefore stemmed from a
desire to automate transactions at the branch level. Thus, at the beginning of the
 sixties, the large American and English banks witnessed the arrival and installation of
their first computer systems. The introduction of information technology in this sector
favored a greater automation of administrative tasks, which in turn favored an
enhanced centralization of decision-making in the banking sector, leading to a
standardization of the offered services.
1.2.3. The Third Wave of Technological Innovations
It was during this period that banks became the first consumers of computer
applications that far outperformed other sectors such as transportation, manufacturing,
etc. The service market was often seen as a non-dynamic sector with zero or low
productivity and struggling to innovate. From this period onwards, investments in
information technology steadily increased. However, this growth has taken place with
disparities between countries, which in the long term contributed to increasing the
gaps between developed and less developed countries. This period is mainly
characterized by important developments in software. It was during this period that
applications such as “Electronic Data Interchange EDI” - a network that allows
payment transfers between banks- were born. This technology was the catalyst for the
development of significant economies of scale and cost savings. This period was also
distinguished by the complete automation of branch transactions, thus reducing the
time and cost of an operation. This surge in automation allowed easier control of the
various agencies by the central office. This wave also marked the birth of electronic
banking. This phase differs from the two previous phases in that the innovations are
both internal and external. Internal, by the extent of the productivity gains fostered by
the development of EDI, and external, by the rapid growth of the ATM network in
various developed countries. The ATM network development was therefore the first
innovation at the level of the bank-customer relationship. This innovation changed the
way, place and time at which customers can contact their bank. It is this phase that
allowed a convergence of telecommunications and computer technology, which gave
birth to the term “information technology”. However, this phase remained dominated
by an internal rationale for banks, namely cost reduction.
1.2.4. The Fourth Wave of Technological Innovations
The development of the Internet, and in particular online banking, is at the heart of the
fourth wave of technological innovation, the “dissemination” phase. This wave is
characterized by the acceleration of the transmission of information flows, the
reduction of costs and the increase in the distance over which information can be
 transmitted. In practice, these changes have led to the development of information
processing methods in the banking sector, as well as a multiplication of distribution
channels, a growing interest in integrating technologies into products and particularly
the development of electronic payment methods. At the beginning of this phase, the
banks started by developing databases (data warehouse) gathering information about
their customers, a method that allowed them to save a considerable amount of time.
Indeed, knowing the qualities of a customer takes only three to four weeks, whereas it
used to take more than five years. In parallel with the development of information
processing, significant progress has also been made around communication. This
fourth wave of innovations is very marked by changes in customer behavior,
particularly in their choice of distribution channels. As a result, developments in
computer and network technologies have enabled the Internet to become a real
account management channel. Internet banking, unlike other distribution channels,
allows greater customization of messages. It allows customers to download data,
personal financial management software, but also to place stock market orders in real
time. The introduction of the Internet in the financial sector today is a revolution.
In fact, the Internet is not a network coordinated by a predefined manager, but a set of
networks that are coordinated through the use of a common TCP/IP communication
protocol between the different computers. This protocol favors the interconnection of
the large networks that existed previously and explains the dramatic growth of the
Internet, which in 1997 had more than fifteen million connected computers and about
eighty million users. The Internet is thus a hierarchy of interconnected networks
linking banks, financial institutions and customers.
1.3. Challenges to the business models of banks
Banks perform several key functions in the economy, more so in bank-dominated
financial systems such as those in Europe and Japan. First, banks process information and
monitor borrowers, which helps them to develop long-term relationships with firms.
Second, banks perform maturity transformation when they extend loans with long
maturities and take demandable deposits. The resulting maturity mismatch offers risk-
sharing to depositors, but it exposes banks to runs. Third, they provide payment services.
In both the US and Europe, banks have had a monopoly in offering retail and wholesale
payment services, as only they have access to central bank payment settlement accounts,
although this is changing. Finally, they offer risk management to their clients and absorb
inventory risk.2 Banks operate different business models. Stricter regulation, together
with a moderation in risk-taking incentives, have modified these business models after the
global financial crisis of 2007-2009. Within the commercial banking model, smaller
banks have reduced wholesale funding in favour of more stable retail funding, while large
banks have remained focused on the universal banking model. Bank profitability was
relatively homogeneous across jurisdictions before 2007 and decreased significantly
during the financial crisis. While US banks recovered to pre-crisis profitability levels by
2013, euro area, British and Japanese banks lagged. The different profitability trends in
the US and Europe are explained by the following factors. The first is the European
sovereign debt crisis in 2011-2013, which was particularly severe for banks in peripheral
countries (the GIIPS: Greece, Italy, Ireland, Portugal, and Spain). The second factor is the
high level of non-performing loans (NPLs), particularly in those countries that were most
affected by the sovereign crisis. In the US, the situation was different due to early
government support that induced banks to quickly clean up impaired assets on their
balance sheets and increase their capital levels. The third factor is the macroeconomic
environment: in the US, fiscal stimulus led to stronger economic growth in contrast to the
much more austere approach imposed in Europe. A consequence of this was a divergence
in interest rates between the two areas. Finally, the market structure is different in the US
and Europe, as the former is an integrated market while, in the latter, retail banking is
fragmented with very little cross-border merger activity. In the euro area, regulatory,
supervisory, financial law and political obstacles to cross-border operations loom large.3
Within the euro area (and in the UK), the level of profitability across banking is also
heterogeneous, albeit at low levels, with general steep declines in price-tobook ratios,
which were below one even before the Covid-19 crisis. Profitability has evolved
differently across the various bank business models. In general, retailoriented banks have
tended to perform better in terms of profitability (return on equity, or ROE, and returns on
assets, or ROA) and cost-efficiency measures (such as cost-to-income ratios). However,
going forward, it is not clear whether the retail banking model will remain the most
successful given that it is vulnerable to low interest rates and the reduction in net interest
margins, which will become more acute after the Covid-19 crisis.
In the pre-Covid-19 world, banking faced three main challenges: a low interest rate
environment, more strict regulation and increasing digitalisation. In the last section of this
chapter, we discuss how these may evolve in a post-Covid-19 world. First, we consider
them in turn. Since the mid-1980s, interest rates have been decreasing, with an
accelerated decline after the financial crisis of 2007. This has been accompanied by a
flattening of the yield curve, which impairs the profitability of maturity transformation. In
the short run, an interest rate cut is beneficial to bank profitability; it translates into lower
funding costs, higher asset and collateral values and lower default risk on new and
repriced loans. In the medium to long run, however, the positive effects of low interest
rates are likely to disappear, since as the short-term nominal interest rates approach the
effective lower bound (because rates on retail deposits do not go below zero) and long-
term interest rates continue to decrease, the net interest margin falls. To boost
profitability, banks can take on more risk, reducing monitoring activity and relaxing
lending standards. The total impact of low interest rates on banks’ profitability is still
debated, together with the differential influence of changes in long-term versus short-term
rates. Low (or negative) interest rates have an adverse impact on net interest margins,
with more pronounced effects for deposit-oriented banks, small banks and lesscapitalised
banks, but other factors – such as reduced risk of borrowers’ default, lower funding costs
and higher non-interest income – may compensate for this. The trade-offs deriving from a
reduction in interest rates may induce a (hotly debated) ‘reversal rate’ – the level of the
policy rate below which a further reduction becomes contractionary for lending and thus
growth. Central banks in countries including Japan, Denmark, Norway, Switzerland and,
more recently, the euro area have introduced a ‘tiering’ system, with the purpose of
lessening the adverse impact of negative interest rates on banks. This is a mechanism that
exempts a portion of banks’ excess reserves from negative rates. In the euro area,
depositfunded banks are likely to be most affected by negative rates. In Sweden, the
implementation of negative rates has been somewhat successful in stimulating inflation
without adversely impacting bank profitability. The country was in a deflationary
situation but was not much affected by the European sovereign debt crisis and had banks
that could maintain profitability despite reductions in their net interest margin due to
negative rates. Before Covid-19, a second major challenge for banking was how to adapt
to the reformed regulatory environment after the financial crisis. Stricter capital and
liquidity regulation has been effective in making the banking system more stable, as we
described in our first report in 2019.4 Banks have increased their capital levels
considerably since the financial crisis of 2007-09. Banks with more capital have lower
funding costs and tend to provide more credit. Nonetheless, this may not hold in the short
run if banks are forced to comply with stricter capital regulation. The reason is that they
may do so by adjusting the denominator of the capital ratio by limiting lending to reduce
risk-weighted assets. In the US, and even more so in emerging market economies where
 the economy and the financial system were less affected by the past financial crisis, banks
have increased both capital and total assets. By contrast, European banks have reduced
total assets while increasing capital slightly. These results are in line with the greater
difficulties experienced in the European banking system relative to the US since the
crisis. As usual, small and medium-sized enterprises (SMEs) and unlisted firms are the
most affected by the reduction in bank lending, since they lack access to the bond market.
Indeed, bank-dependent countries like those in Europe are more affected because bond
markets are less developed. In summary, regulation has contributed to the build-up of a
more resilient banking sector, while at the same time contributing to a reshuffling of part
of their business within and outside the sector. What remains to be seen, however, is the
extent to which the new growing lenders will be able to substitute for bank lenders and
what this will imply in terms of overall risk in the financial industry. The third major
challenge facing banks is digitalisation. The disruption that the application of digital
technology brings to financial intermediation is major and concerns many lines of
business. Payments is perhaps one of the most affected, and the introduction of central
bank digital currency (CBDC) may represent a major threat to the traditional banking
model depending on its implementation.

1.4. Digital money, payments, and banks

Payment technology has been disrupted and, together with digital money, this poses a
challenge to the traditional bank business model. Cash is being used less and less; Covid-
19 is accelerating this process. Money, along with its three main functions (a unit of
account, a medium of exchange and a store of value), was identifiable by being associated
to the object through which value was transferred during a transaction (for example,
banknotes issued by a central bank). Banknotes are accepted because of a combination of
their legal tender status and, more importantly, the trust by the public in its face value and
its stability over time. The three functions of money become more difficult to identify – in
particular, the fundamental medium of exchange function – when we move from physical
cash to bank accounts. This is because typically there is no legal tender status for bank
accounts and because we need a payment technology for the asset to become a medium of
exchange. A bank account, as a form of digital money, creates a separation between the
asset and its value and the medium of exchange function. In other words, we need a
payment technology to convert a bank balance into a medium of exchange so that it
becomes ‘money’. The coexistence of different payment technologies has mostly been
managed by banks – from the deposit accounts connected via settlement systems through
the central bank, to credit or debit cards, to cheques or bank-to-bank electronic transfers.
The increasing digitalisation of our economic activities, fostered by technology platforms
and social media, has led to increasing customer demand for faster and cheaper forms of
payments. Early FinTech start-ups realised that working with bank deposits was difficult
and costly because it typically required using the expensive and slow credit card
infrastructure. In addition, banks were not willing to give easy access to potential
competitors. Cryptocurrencies and the associated blockchain technology became a natural
solution for these new demands for alternative digital assets outside of the traditional
deposit-taking institutions. Money can be stored in any form of trusted database (digital
ledger). Mobile telephone providers (such as M-Pesa in Kenya) or BigTech platforms
(such as WeChat or Facebook Pay) have also created digital repositories of value that can
be used for payments. The recent Covid-19 pandemic has accelerated the trend towards
digital forms of payment. It is very likely that the forced adoption of digital forms of
communication and related ways of doing business will have a long-lasting effect on our
daily routines, certainly including payments.
There are many forms of digital money. 8 The most common is bank deposits;
cryptocurrencies and stablecoins are other forms of digital money. Many other examples
of digital currencies already exist, including Alipay and WeChat Pay in China, M-Pesa,
and the Libra project sponsored by Facebook. Cryptocurrencies such as bitcoin have
inherent drawbacks – the time and cost of transactions or regulatory threats due to their
facilitating money laundering and criminal activity, for example – that make them more a
speculative investment rather than a store of value and/or means of transaction.
Stablecoins refer to digital assets that are liquid enough to be considered money and
whose value is fixed to a currency. Quite a few stablecoins are designed as currency
boards, which are an extreme version of fixed exchange rates. The stability of the
stablecoin is promised with a pool of liquid assets denominated in the currency to which
the coin is pegged and of equal value to the liabilities being used. The stability of the peg
is guaranteed by the commitment to the redemption mechanism. Libra, promoted by
Facebook, is an example of a global stablecoin (as it was announced originally). Libra
promised a fixed value relative to an explicit basket of currencies, with the weights of
each of the currencies known in advance. There are technical issues concerning how to
ensure that the valuation of the assets matches that of the liabilities, and, in any case, the
Libra would fluctuate relative to national units of account. The potential destabilising
effect of running a parallel currency and its influence on a country’s monetary policy, as
well as other regulatory issues – not least the potential threat to the international status of
the dollar – have raised concerns amongst policymakers. In response, the latest proposal
by the Libra Association is to also issue a set of single currency stablecoins (using the US
dollar or the euro as the reference). A key issue for digital currencies is stability.
Electronic money (e-money) is exposed to liquidity, default, and market risk (including
foreign exchange risk), which can be minimised by the issuers with prudential measures.
E-money issuers typically hold bank deposits that are not protected by deposit insurance
because those deposits are wholesale. Despite these limitations, e-money may gain
ground, as it has done in China and Kenya, because of its convenience, the low
transaction costs (for cross-border payments), complementarity with blockchain
technology, and the power of network effects. Digital currencies may threaten the banking
sector with disintermediation if substantial retail deposits were to move to e-money
providers. In an extreme case of disintermediation, deposits would go to e-money
providers that invest in very safe short-term assets (if they have access to central bank
reserves) and thus become narrow banks. Central bank digital currency (CBDC), allowing
access to central bank accounts for everyone (‘reserves for all’), not just commercial
banks,9 represents another form of disintermediation. Either form could undermine the
fractional system by unbundling one of the main banking functions. CBDC has potential
advantages. It may foster innovation in payments, in addition to facilitating cross-border
payments, avoiding potential monopolisation of digital money provision, and making
monetary policy transmission more effective. If physical cash is less relevant and so the
zero lower bound constraint does not bind, the central bank would potentially be able to
set negative interest rates. Last, but not least, in a deep economic crisis such as that
induced by Covid-19, which requires large stimulus packages by governments, transfers
to individuals or grants to firms need to be made through bank accounts, but the necessary
government information might be incomplete. With a digital form of money available to
all citizens, however, these payments could be made immediately. The potential
disintermediation of the banking sector induced by CBDC could be limited, insulating
bank balance sheets, if necessary, even if households or firms shift funds from deposits to
CBDC.11 A cohabitation scenario of banks and e-money providers is likely, with the
latter complementing banks’ offerings either by catering to population segments not
covered by banks or forming partnerships with banks. E-money providers would compete
 for funds and force banks to improve their terms and service to retain customers.
However, if e-money providers do not have access to central bank reserves, then they
would be subject to market and liquidity risk even if they deposit client funds as
wholesale deposits. This would make the system less stable since e-money holders would
run to banks to obtain their deposit insurance protection in case of trouble. At the same
time, banks’ funding may also become less stable since the banks would be holding the
volatile wholesale deposits of e-money firms.

1.5. Banking in a post-Covid world

Covid-19 will accelerate some existing trends in the banking sector, will temporarily
reverse others, and will influence the players in the sector (including the regulators).
Covid-19 will deepen and lengthen the period of low or negative interest rates and will
accelerate digitisation and increase investment in IT, with operational risk and cyber-
attacks on the rise. It will temporarily increase NPLs, hurting profitability, impairing the
ability of banks to generate capital and buffers, and constraining their capacity to provide
loans. In the euro area, it will reinforce the doom loop between sovereign and bank risk,
since the foreseen large increases in debt-to-GDP ratios, in Southern Europe, may raise
problems of sovereign debt sustainability over the medium term. The Covid-19 crisis will
also lead to a temporary relaxation of capital and liquidity requirements. However, over
the long run the outcome may be the opposite to protect against tail events, which seem to
happen more often than expected. In the pre-Covid-19 world, banks were facing the
challenges of low interest rates, the legacy of the global crisis with high NPLs, new
competitors and digitalisation and a much heavier regulatory burden. In the post-Covid-
19 world, these challenges will intensify, with only temporary alleviation of the
regulatory burden due to the impending crisis. The Covid-19 crisis makes evident that
low interest rates are here to stay for much longer than was expected before the crisis. The
prospect of negative economic growth and higher indebtedness will translate into even
lower interest rates, both nominal and real, with several central banks – including in the
UK and US (see Table 1) – already having declared an extended LIRE period. This will
lead to further pressure on banks’ profitability and, in turn, cutting of costs. Low rates will
continue to reduce banks’ net interest margins but may help contain default by firms and
preserve collateral values somewhat, thus mitigating the new increase of NPLs. In any
case, banks will again suffer a surge of NPLs due to the crisis which, together with
persistent low profitability, will impair their ability to generate capital, constraining the
capacity to provide loans to the real sector. Banks remain exposed to credit risk in lending
to the economy during the crisis, at least as regards loans outside of or beyond the
coverage of government guarantees. Both central banks and regulators have taken
measures to enable banks to keep lending during the crisis (see Table 1). Central banks
have implemented several measures to ensure liquidity to banks and credit to the
economy, such as the ECB’s modified TLTRO-III and the re-introduced LTRO policies,
and relaxed criteria for collateral eligibility in liquidity operations. Regulators and
supervisors have relaxed several regulations to reduce the potential procyclicality of
measures introduced in the last two decades and to avoid a credit crunch. Supervisors
have provided temporary relief by allowing banks to fully use their capital and liquidity
buffers, and have relaxed accounting procedures, introducing more flexibility in the
criteria for loan classification as well as in the implementation of IFRS 9. In addition, the
2020 stress tests have been postponed and the implementation deadlines of Basel IV have
been extended in different jurisdictions. Liquidity and capital relief are a temporary
reversal of the increased prudential requirements that were imposed on banks in the
aftermath of the 2007-2009 crisis. A question arises over whether the relaxation of the
implementation of IFRS 9 is appropriate, as it may change the accounting of expected
losses in the middle of a crisis. The pre-Covid-19 analysis of the impact of the 2007-2009
crisis and post-2008 regulatory reforms (see the first Future of Banking report)15 can be
used to ascertain the resilience of the banking industry to the Covid-19 shock. Even
though those reforms have made the banking system more resilient, it is not clear that this
is enough for a shock of the type we are facing at present.