Banks prioritizing customer and employee needs should benefit shareholders April 3, 2020By Dan DormanESG Senior Research Analyst, Calvert Research and ManagementWashington -- The impact of the COVID-19 pandemic has been profound, and a great deal remains unknown about the full extent of the economic shock, when a recovery will begin to take place and how such a recovery will unfold.Severe economic hardship places stress on the relationships between institutions and the various stakeholders they serve. We saw this during the Great Financial Crisis of 2008-2009 when many financial firms failed to comprehensively manage a diverse range of stakeholder concerns resulting in harmful reputational, regulatory, political and financial consequences. This mismanagement brought about considerable destruction of economic value for shareholders. For many Americans, the reality of taxpayer-funded assistance for overleveraged and poorly managed banks along with little consequence for executives - all while millions of customers lost homes, savings and livelihoods - ultimately did irreparable damage to their trust in the financial system. For many, that trust has not fully been restored. Lessons learnedThe COVID-19 pandemic is fundamentally different from the Great Financial Crisis, but it does provide an opportunity for a better - stakeholder-based - approach to managing the priorities of financial firms through a period of crisis. Encouragingly, some initial positive signs are emerging that banks are taking steps to support a variety of stakeholders in this time of need. However, we expect the full consequences of this event to require significant actions to be taken and maintained on the part of banks over the next two to three years to support clients through this uncertain period. The banking system is entering today's pandemic with capitalization and liquidity levels that are multiples of what they were prior to the Great Financial Crisis and some of the most important financial institutions in the country have taken voluntary steps to go even further; eight of America's largest and most important financial institutions announced the suspension of all share buybacks through the Financial Services Forum.1 This is a positive first step. As the crisis unfolds, these institutions may need to take further actions to conserve capital, such as reducing dividends, to support bank balance sheet capacity and the credit needs of the clients they serve. A position of financial strength is a prerequisite to being able to provide credit to households, small business and corporations through a period of economic stress. This period of stress will undoubtedly be challenging. It will require banks to simultaneously and effectively serve individuals and small businesses facing cash flow constraints and high levels of indebtedness, while ensuring employees remain safe yet able to perform essential activities to the functioning of our financial system. Institutions capable of balancing the needs of a diverse range of stakeholders during the COVID-19 pandemic will be best positioned to succeed and capture value over the course of the eventual economic recovery.Customer needsThe banking system will face pressures as its core customer segments - individuals, small- and medium-sized businesses, large corporations, and state and municipal governments - will face extraordinary funding needs and unique financial challenges adapting to the impact of COVID-19. Financial intermediaries will be pressured to balance many of these needs simultaneously. Those firms that prioritize the near-term needs of the customers and clients they serve will ultimately do what's best for shareholders in the long term. For individuals and small businesses, many financial institutions have already responded by putting the needs of those customers first. PNC announced a special emergency loan program available to current customers that provides $1,000-$5,000 at a special, low interest rate. Citi has waived service fees for one month as well as early withdrawal fees for certificates of deposits.2 All of these are positive initial steps but much will be required in the coming months to continue to support customers. Small businesses will be particularly hard hit during this economic shock. Banks are the primary conduit between the nation's small businesses and the stimulus measures enacted through the CARES Act. Banks like Fifth Third voluntarily offered small-business clients payment and fee waivers for 90 days as well as loan modification options. Many other banks will need to do the same and support the flow of credit to small businesses as was intended by the government's stimulus. Furthermore, banks will need to utilize the relaxation of loan modification regulatory treatments to support restructuring and modification needs. The facilitation of credit for corporations and municipalities will also be imperative. While the funding markets for corporations have experienced disruptions in recent weeks, corporations have generally appeared to be able to draw on existing lines of credit without significant issue. Bank credit will be increasingly important for corporations in the near term, as public capital markets may not be optimal as expedient sources of capital. The slate of initiatives taken by the Federal Reserve to support market liquidity and financial intermediaries should also serve as a source of strength for this funding avenue. Acting in good faith now, meeting and exceeding commitments to clients, and serving the unique needs of customers large and small through this tumultuous period can advance a firm's ability to acquire and retain clients, deepen relationships, bolster reputations and brand value, and, ultimately, provide shareholders with the best position to capture value over the long term.Employee health, safety and well-beingFinancial services firms have some of the most highly educated and technologically competent workforces in the American economy. This allows for considerable portions of bank workforces to take advantage of remote work options and exercise social distancing. However, many other roles are essential to maintaining financial exchanges and facilitating the flow of credit through the economy during times of need. Thus far, there have been encouraging efforts to maintain the physical and financial health of employees across the financial services sector. Intercontinental Exchange moved the NYSE to all electronic trading to keep employees and the trading community safe.3 Morgan Stanley's James Gorman has publicly pledged to avoid any layoffs through the duration of 2020. Citigroup's Michael Corbat has also suspended all cuts to staff until further notice. Many other banks are waiving sick leave for employees impacted by COVID-19.4Firms that do everything in their power to keep employees safe and on the payroll during this period of stress likely will engender respect and goodwill in the marketplace for decades, enabling the acquisition and retention of top talent and supporting value creation for shareholders over the long term. Bottom line: America's banking system entered the COVID-19 crisis in a position of relative financial strength that should provide it with ample opportunity to effectively serve individual customers, corporate clients, employees and policymakers in this period of great need. Those financial institutions that balance the needs of stakeholders throughout the course of the pandemic and beyond will be best able to capture the inevitable flight to quality, gain market share and position shareholders to capture value over the long term.