How COVID-19 Has Impacted The Financial Services Business

The human and business impact of the COVID-19 pandemic continues to develop around the world. The rapid pace at which the pandemic is spreading and global efforts to contain the pandemic are having an unprecedented impact The Financial Services Business on the way we live and do business. While it is too early to fully understand the long-term implications of these events, financial institutions in the banking and equity, insurance and wealth management sectors need to prepare for the TP impact of the new normal.

Since the inception of the closures, almost all employees of financial services Business firms have worked from home, affecting many people working outside their country of employment. During this period, the OECD issued initial guidance that an internal office should not create a permanent establishment (PE) as restrictions are likely to be temporary and enforced by the government. However, with the reduction of blocks at various speeds around the world and the resumption of international travel, the question remains as to what that means for business travel. This raised the question of whether a home office can be a PE company if travel restrictions are removed but employees continue to volunteer from home.

COVID-19 Financial Services Business has certainly accelerated the question of the future of the workplace and its importance for operational models. Groups reexamine their operational models, particularly where key executives and decision makers were previously in business, in order to establish more centralized models while serving customers without creating additional PE risks. This is a complex task, especially as tax legislation in this area is further developed with the work of the OECD in Action 1 on the tax challenges arising from digitalisation, and in particular in the first pillar.

The Financial Services Business institutions should rethink their TP policies approaches in light of potential loss situations and bear any payments that may be triggered. Market volatility could also be based on critical assumptions in existing Preventive Price Agreements (APAs), which need to be carefully examined and possibly clarified with the relevant tax authorities.

This article examines the impact of the COVID-19 pandemic on the financial services sector, focusing on key challenges from a TP perspective and key practical issues.

Bank and capital markets

The new regulation after the 2008 global financial Business  crisis served banks well as the COVID-19 pandemic hit the market. Compared to banks, households and businesses have entered into crisis with relatively high levels of debt and, therefore, are more susceptible to economic shocks.

The banks have been asked to support government programs that provide emergency funding or reserve liquidity through credit lines. As corporate and household debt increases, so too do banking risks, including credit misallocation, credit losses, and possibly bank creditworthiness.

Central banks practice of aggressively cutting interest rates past historical lows has continued to put bank interest margins under pressure. Although central banks focus on corporate finance, they may later choose to emphasize test bank resolutions developed after the global financial crisis.

While there may be differences between bank profiles, geographic location or business mix, the sharp decline in banks' equity prices could indicate that investors are increasingly concerned about the  profitability and prospects of the banking sector. The perceived investment ratios for banks were further reduced by official requirements that prevent the repurchase of own shares and dividends. This could indicate that banks can replenish their capital reserves only through income (including bonus restrictions) and withholding dividends, and not through the issue of rights.

The almost immediate move to remote working has also underscored the need for continued investment in IT systems and technology to meet customer needs, as well as published statements on banks' real estate footprint. Over time, this could hurt traditional value-adding functions in the banking sector, particularly the rise of fintech in the industry.

All of this pressure can lead to losses across the banking sector. You may need to refer to the accounting templates to test how the loan approval process works in the COVID-19 environment and whether this impacts  the position of the Key Enterprise Risk Taking (KERT) function in a scenario in the corporate lending industry. In addition, the impact on risk-weighted assets and the impact of capital allocation on branches must be carefully assessed under the OECD Authorized Approach (AOA). It may also be necessary to review how the sector's profit-sharing models work in loss-sharing situations and to reconsider the allocation keys.

Typical TP models that attribute minimal cost to the rewards from sales branches may need to be retested to obtain "more" or adequacy in a COVID-19 environment where the bank is making an overall loss. The plus will also build on benchmarking research prior to COVID.

Another area that may need to be analyzed is the impact of a liquidity constraint on TP models of bank funds and the potential impact on legal entities and branches within a banking group.

Insurance

By its very nature, the insurance industry is generally well prepared to deal with major losses in the industry such as the COVID-19 pandemic. Several insurers have learned from the 2003 SARS outbreak and introduced disclaimers for communicable diseases and pandemics in most non-food products such as business interruption (BI) and travel insurance. However, there is still uncertainty about the full scope and timing of insurance claims for life and health insurers, as the effects will vary from country to country. The industry is closely monitoring the impact on mortality rates, and life insurers also expect to be hit hard by financial markets (e.g. life bonds).

As general insurers continue to experience business interruption and compensation claims (e.g. cancellation of events) which could lead to a reduction in capacity (ie available capital) in the market. Given the trend towards higher combined ratios and falling return on equity due to COVID-19 losses, insurers will need to increase rates, resulting in higher premiums. This has led some insurers to raise additional capital in the market in anticipation of a strong strengthening market in early 2021.

As a result, multinational insurance groups are examining how potential COVID-19 claims can affect their relief.