MSc Finance Research Paper 1. Title of the Research Paper: “THE IMPACT OF MACRO-ECONOMIC VARIABLES ON STOCK MARKET PRICE.” 2. Number of pages of the body: The Research paper should have a body of 12...

Introduction
In this research paper, we will analyze banking risks in 2020. The year 2020 has been marked with the novel Corona virus pandemic, also known as COVID-19, which is currently having an impact on the overall banking systems around the world. Therefore, we will study the effect of pandemics the banking system. Due to the COVID-19 outbreak, the banking industry has been impacted significantly in the US and the operational and the credit risks have increased significantly. As we already know that the United States is one of the worst hit countries in the world and due to lockdown, the economic activity in the country has suddenly gone down significantly. The global financial crisis led to a series of defaults for the banks and due to this, we saw a series defaults and this COVID situation is going to be worse in nature due to the uncertainty towards the vaccine development and eradication of virus from the community.    Comment by Fox Computer Services: Similar? Worse – what is the difference in severity and timeframe?
Apart from the banking, we would also look at the corporate credit risk that will be presented to the firms based on the frequency of defaults for these bonds and this will help us understand how the credit rating plays a role in the stocks as well as bonds performance. However, the government intervention by increasing the payment deferral period might help these firms up to an extent.    Comment by Fox Computer Services: Will it be severe or government intervention will help?
Conversely, with the COVID -19, there would be a high amount of defaults can be envisaged. Credit risk, as measured by the TED spread, has increased in March, though early Fed policy may have helped prevent it from rising as much as during the Financial Crisis of 2007-09. The bond yields are shooting up. The moratorium periods for loans have been increased in some countries and that would put extra burden on banks. In order to compensate for this, banks would implement aggressive policies and this would increase the portion of the non performing assets. Banks would try to reduce the interest rates to incentivize the spending and borrowing and the net interest margins of banks could take a hit. Hence, banks are going to face a lot of risks moving forward due to the COVID – 19.     Comment by Fox Computer Services: No thesis – This will be worse financial crisis ever?While there is extraordinary so is the government intervention and I believe the crisis will be contained.
Literature review    Comment by Fox Computer Services: Great insight – paragrapgh What would be a thesis statement reflecting your view after this research?
Banks in the situations of the liquidity squeeze (Ioan, T., &Dragoş, P. 2006) tend to have the major issues since they are not able to meet the requirements of people wanting their deposits back. Due to corona virus,the global financial crisis had the similar after effects in the economies that the COVID -19 (Fernandes, N. 2020), novel coronavirus originated in China towards the end of the 2019, which has turned into a global pandemic, has in the current times where the yields are spiking up and the bond prices are going down. The credit agencies have cut the growth rate of major economies down.We can try and understand the implications for the banks by both these events and can evaluate what this means for the banks regulators and what proactive steps need to be taken in order to make sure that the sustainability of the banks can be achieved. Compliance risk in the bank has increased due to market disruption and lesser control of the regulators on the economy (Plohl, Nejc, and Bojan Musil.).According the paper on the risk of the COVID-19(Barrios, John M., and Yael Hochberg, 2020) the credit risk poses the biggest threat to the stability of the banking system. The operational risk, in the worldwide economies has increased due to contraction in the policy rates (Vattay, Gábor. 2020). The Federal Reserve relief package will serve as a stimulus for the economy and banks have taken proactive measures too to ensure that they minimize the impact on the economy. The risk of corporate credit has affected different firms differently. Customer satisfaction and retaining is still a key for the banks to make sure they can revive in the long term.The major risks that banks face, in general are interest rate risk and asset liability mismatch (Bodie, Z. 2006) risk which could wipe off the equity or leads to a bankruptcy for a bank within no time. To immunize the portfolio which is full of all the financial assets, Redington immunization (Shiu, E. S. 1990) and full immunization could be used to resist against the changing interest rate environment (Appendix). Based on this research we believe that the banks will face major risks in terms of the operations and credit, but the government intervention will alleviate this to some degree.
Analysis
We broadly distinguish the risks of the banking industry in 2020, majorly due to COVID-19, into two categories. 1. Operational risks, 2. Credit risks. We have further divided these risks into technological risk, geographical concentration risk and Business Concentration risk.
Key risks
The major risks are credit risk and the operational risk.
Credit risk in banks
Due to COVID-19 outbreak, the economic activity across all the nations has slowed down significantly. Hence, we small and large businesses have their operations dysfunctional due to the extended lockdown periods. Individuals who highly rely on daily wages tend to face a lot of problems when it comes down to the loan payments for them. Individuals face problems meeting their debt obligations related to mortgage, working capital loans and the education loans too. Apart from this, some businesses will take a considerable time in order to overcome the impact created by the COVID and this can significantly increase the credit losses for the banks due to failure to meet the repayment requirements.
According to a Deloitte report on COVID-19 and banks, the banks all over the world have increased the provision for the charge off against the credit losses due to non repayment of the loans even after increasing the moratorium period will lead to a significant impact on the bottom line of the banks. As per the figure presented below[footnoteRef:1], we see the projected...