What continues to unfold globally is the human and business impact of the COVID-19 pandemic. Having an unprecedented impact on the way we live and do business is the rapid pace at which the pandemic is spreading and therefore the global actions are taken to curtail it. Financial institutions across the banking and capital markets, insurance, and asset management sectors must inure the TP impact of the ‘new normal’, while it’s too early to totally understand the long-term effect of those events.
Since the lockdowns began, nearly all financial services companies’ employees, including the people from Slaton financial services, are working remotely from their homes, which has involved many individuals working outside the country of their employment. Now, the OECD released initial guidance suggesting that a home base shouldn’t create a permanent establishment (PE) on the idea that any restrictions were likely to be temporary and enforced by governments. However, a matter remains regarding what this suggests for business travel, as lockdowns are being eased at different speeds globally and international travel is resuming. Whether a central office may constitute a PE of an enterprise if travel restrictions are lifted but staff still work from home voluntarily, has created a matter.
The subject of the longer term of the workplace and what this suggests for operating models are what COVID-19 has certainly accelerated. To determine more centralized models while continuing to serve customers without creating any additional PE exposure, groups are reviewing their operating models, particularly where senior executives and key decision-makers previously traveled for business. This is often a posh task, particularly as tax legislation during this area continues to evolve with the OECD work on Action 1 on the tax challenges arising from digitalization, and particularly under pillar one.
In the light of potential loss situations and support payments that might be triggered, financial institutions will have to revisit their TP policies/approaches. The critical assumptions of existing advanced pricing arrangements (APAs) that have to be carefully considered and potentially clarified with the relevant tax authorities are what market volatility could also invoke.
Specializing in the key challenges from a TP perspective and also the important practical takeaways, this article explores the impact of the COVID-19 pandemic on the financial services sector.
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Banking and capital markets
What put banks in good stead when entering the COVID-19 pandemic is the re-regulation following the 2008 global financial crisis. Households and firms are more liable to economic shocks and entered the crisis relatively highly leveraged compared to banks.
Providing emergency funding loans or stand-by liquidity through loan facilities, banks are called upon to support government-led schemes. With banking risks, including credit misallocation, credit losses, and possibly banks’ own solvency rising further, so too are corporate and household indebtedness.
The practice of central banks aggressively cutting interest rates even farther from previous historic lows has put additional pressure on banks’ interest margins. Furthermore, they’ll later like better to check banking resolutions developed after the worldwide financial crisis while central banks are focused on funding businesses.
large declines in bank equity prices may suggest that investors have become even more concerned about profitability and prospects for the banking sector while there could also be differences between banking profiles, geography, or business mix. The perceived investment case for banks is what the regulatory edicts preventing share buy-backs and dividends have further reduced. Through earnings (including bonus restrictions) and retained dividends, instead of through rights issues, this could suggest that banks will only be ready to replenish their capital buffers.
The almost overnight switch to remote working has also highlighted the requirement for continued investment in IT systems and technology to serve customer needs, likewise as publicized pronouncements about banks’ property footprint. Over time, this could affect the standard value-driving functions within the banking sector, notably the increase of fintech within the arena.
All these pressures may result in losses across the banking sector. Booking models might have to be scrutinized to fret test how the credit approval process is functioning within the COVID-19 environment and whether this affects the placement of the key entrepreneurial risk-taking (KERT) function during a corporate lending branch scenario. The way the sector’s profit split models will add loss split situations might have to be revisited and allocation keys reconsidered.
The insurance industry is by its very nature generally well prepared to handle significant industry loss events, like the COVID-19 pandemic. Like business interruption (BI) and travel insurance, several insurers learned lessons from the SARS outbreak of 2003 and introduced exclusion clauses for communicable diseases and epidemics/pandemics into most non-life products. However, there’s still uncertainty related to the complete extent of claims for all times and health insurers and therefore the timing of these claims, because the impact will vary country by country. As life insurers also are expecting to be severely tormented by the financial markets (e.g. life investment bonds), the industry is closely monitoring the effect on mortality rates.
It could potentially lead to a reduced capacity (i.e. available capital) within the market as business interruption and contingency claims (e.g. event cancellations) still unfold for general insurers. Insurers will have to increase rates, which is able to end in higher premiums with a trend towards higher combined ratios and decreasing levels of return on equity thanks to COVID-19 losses. This has led to some insurers raising additional capital within the market, in anticipation of a ‘hardening market’ in early 2021.