Posted by MeridianLink | October 25, 2022

How Financial Institutions Can Stay Resilient During a Recession

No one can predict the future, but when it comes to economic performance, many try. The probability that the U.S. will enter a recession in 2023 is 80%, according to Steve Hanke, a professor of applied economics at Johns Hopkins University. That’s higher than the 52% chance of recession predicted by a September 2022 survey of fund managers, strategists, and economists. 

Stephen Roach, former chairperson of Morgan Stanley Asia, cautions it will take a “miracle” for the U.S. to avoid an economic downturn that could last into 2024. 

So how can financial institutions stay resilient during a recession? The first step is reflecting on lessons learned from past economic crises. The next step is leveraging technology to prepare for future growth. 

Looking Back at the Great Recession of 2008 

The worldwide financial crisis of 2007–2009, also known as the Great Recession, was the worst economic downturn since the Great Depression. 

The recession began in 2007 when real estate prices declined an average of 40% after a decade-long housing bubble. A combination of falling home values, surging unemployment, and rising interest rates on subprime adjustable-rate mortgages (ARMs) left many homeowners unable to make their payments. 

These factors led to a steep rise in mortgage delinquencies, foreclosures, and the devaluation of mortgage-backed securities—all of which had a devastating effect on financial institutions and the overall economy. 

Considered “too big to fail,” some U.S. banks were buoyed by the federal government, while others merged with larger institutions or went under. According to the FDIC, 561 U.S. banks failed from 2001–2022 with the highest number (465) collapsing in the five years from 2008–2012. In contrast, only eight banks failed in the five years from 2018–2022. 

Considering the Ongoing Effects of COVID-19 

Following the Great Recession, the U.S. entered its longest period of economic recovery and growth from 2009–2020. According to the Center on Budget and Policy Priorities, economic expansion ended when COVID-19 produced a sharp contraction in March 2020. 

Whereas the Great Recession resulted in what’s known as an L-shaped recovery, which is characterized by a deep recession trough and lengthy rebound period (as depicted by the letter L), the COVID downturn has resulted in a K-shaped recovery. 

Although the Great Recession lasted less than two years, it took up to six years for some key economic indicators to reach pre-recession levels, and the overall economy still hadn’t reached its pre-recession level a decade later. 

The difference after COVID is that some industries and individuals have experienced a strong recovery, while others are still struggling to regain their footing (thus, the K shape with one line going up and one going down).  

Leveraging Technology to Prepare for Future Growth 

With yet another recession looming, financial institutions can take three key steps to position themselves—and their consumers—for a stronger future when the economy rebounds: 

1. Boost Automation to Increase Efficiency & Lower Costs 

In any economy, automating manual business processes will help financial institutions meet consumer needs faster and at a lower cost. Automation can also reduce human error and increase organizational efficiency by eliminating unnecessary tasks and maximizing staff resources. 

2. Invest in Digital Transformation to Stay Competitive 

Digital transformation isn’t a one-and-done deal. It’s a cultural shift that requires financial institutions to integrate technology into all aspects of their business. Whether or not 2023 brings recession, consumers still expect engaging digital experiences plus personalized products and services that help them achieve their financial goals.  

Meeting—or, even better, exceeding—consumer expectations is the best way for FIs to stay competitive and accelerate growth. 

3. Streamline Processes Incrementally 

Financial institutions hesitant to invest in the complete transformation of core banking processes can take a more incremental approach. Instead of committing to a larger upfront investment, they can streamline specific processes that offer immediate as well as long-term returns on their investment. 

For example, technology that simplifies the loan application process would result in faster decisions for borrowers while minimizing workload for staff, and this would likely result in immediate and long-term gains for the business. 

End-To-End Digital Solutions 

As analysts continue to monitor the health of the economy, learn more about end-to-end digital solutions that can help financial institutions accelerate growth by exceeding consumer expectations in any economic climate.

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