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The COVID-19 crisis has had a significant impact onthe financial services industry. Some of theeffects will be short-term, but a new report from Moody's identifieskey long-term effects.

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"We expect there will be far-reaching longer-term effects thatwill fundamentally reshape many aspects of the macroeconomy,business life and consumer behavior," says Stephen Tu, VicePresident – Senior Credit Officer at Moody's Investors Service andauthor of the report. "Identifying the long-lasting impact ofthis experience will be paramount for credit analysis."

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Moody's report identifies three key long-term impacts resultingfrom the COVID-19 crisis: 1) the expected recession will compelbanks to maintain low interest rates for years to come; 2) anaccelerated migration to digital processes and service, by bothbusinesses and consumers; and 3) a shift toward social corporatestrategies.

1. Low interest rates

Lower, or even negative, interest rates will remain for theduration of the overall financial crisis that most of the world isfacing, which will erode profitability for banks that don't borrowon the wholesale markets. "Banks that predominantly finance theirlending with customer deposits rather than borrowing on wholesalemarkets will see profitability eroded by persistently lowerinterest rates," Tu says.

2. Digital services

Sending most of the country's white collar workers home to workremotely has caused a large-scale shift to digital services and arethinking of old business habits, the report finds. "The suddenand extreme experience of the pandemic is proving to be a catalystwhere old habits are suspended, allowing consumers to experiencenew digital ways of accomplishing trade and commerce," Tu says.

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Customers that may have been reluctant previously to embraceonline commerce and banking have been forced to adopt thetechnology and companies that don't support these services may befaced with a shutdown of revenue.

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Expense-heavy information-based businesses, such as financialservices companies, are key beneficiaries of the work-at-hometrend. "Those firms that more permanently and successfully adoptelements of remote working should have more cost savings to realizeas this trend progresses," Tu says.

3. Corporate social behavior

Responding to societal trends, some companies are placing moreemphasis on the needs of their stakeholders — employees, clients,society in general and the environment — than their shareholders, atrend that has gained traction among investors and CEOs, accordingto the report.

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"We expect the rising economic hardship caused by the pandemicto accelerate this nascent trend toward stakeholder rather thanrentier capitalism," Tu says, noting that the high unemploymentrate may contribute to this sentiment.

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Financial services companies have always had to balance thedesire for profitability with the need to provide for the socialgood, and "the balance between these two forces has shifted infavor of the latter since the global financial crisis," Tusays.

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Steve Salkin is a Managing Editor for ALM.He can be reached at [email protected].

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