The Coronavirus (COVID-19) pandemic has disrupted society in ways that seemed unfathomable a few weeks ago. What short-term and long-term impact will it have on society and business? Past epidemics and disasters have often resulted in widespread, long-term, permanent changes in society. New technologies, such as the cloud, artificial intelligence (AI), automation, and robotics are all being used as part of the response to COVID-19 and to keep businesses going. Catalyzed by global disruption, these technologies, that were previously adopted sporadically, are likely to drive long-term technological changes in workplaces across industries and enable human workers to do better, higher quality tasks.
We have been quicker to adopt cloud services in our personal and social lives than the business world, mostly because the data that companies use to run and grow their businesses is highly sensitive. It's taken a while for companies to transition from in-house data and systems management to cloud computing, but that too is changing—and expected to change even more rapidly due to COVID-19.
Businesses have been forced to shut down offices across the globe and many office-based employees are working from home. Cloud-enabled businesses have rapidly transitioned to telework models with minimal disruptions so far. Technologies using mobile communication and videoconferencing are now being put to test, and being proven to work effectively (most of the time!).
Past crises and tragedies have resulted in accelerated testing of “risky” novel technologies. In the days following 9/11, researchers from i-Robot, Carnegie Mellon, USF, and other robotics labs rapidly deployed their research ground robots for search and rescue efforts at the site. These ground robots, previously used for basic research, were able to traverse vast debris fields and venture into areas too dangerous for humans and dogs. In that crisis, they demonstrated indisputably that they weren't merely expensive research curiosities but viable autonomous systems capable of standing in for humans in dangerous situations.
Robots have been used for search and rescue in the aftermath of many subsequent disasters, such as hurricanes, building collapses, even the 2011 nuclear plant meltdown at Fukushima.
In the COVID-19 crisis, advanced experimental technologies are again being used in dangerous situations. The contagiousness of the virus makes human-to-human interactions very risky; this has cleared the way for robots and lots of other automated technologies to help out in many ways.
Long standoff infrared scanners that measure a human’s temperature at a distance were previously used only experimentally; now they are being used in the field to assess patients’ conditions from far away. Experimental humanoid service robots are being used to disinfect rooms, communicate with isolated people, take vital information, and deliver medications.
In Washington state, a robot helped doctors treat an infected patient and communicate with medical staff while limiting their own exposure to the illness. In China, robots are disinfecting patient rooms using ultraviolet light to kill viruses and bacteria, transporting food, and picking up litter from patients. Self-driving vehicles are delivering supplies to medical workers in Wuhan and making retail deliveries on e-commerce orders, while drones are being used to patrol public places, spray disinfectant, and conduct thermal imaging.
Artificial intelligence is being used to track and predict the spread of Coronavirus, helping spot COVID-19 faster than humans from CT scans, and search for possible treatments using AI-powered drug discovery platforms. AI solutions are being aggressively deployed by e-commerce firms to predict demand and improve supply, even as global supply chains falter. Organizations are also using AI to ensure business continuity as more workers telework, leveraging and expanding automation solutions that allow machines and humans to work together.
The initial successes of advanced technologies such as robotics and AI will spur their adoption and acceptance going forward. One can envision a future where teleconferencing is used more widely, in favor of reduced business travel; autonomous vehicles and drones gain the trust of a wider swath of society; and robots are used for manually repetitive or dangerous tasks at work and at home. Online learning may become more prevalent after educational institutions conduct e-learning on a massive scale during this crisis, and AI will make global supply chains more resilient even as human-machine collaborative systems ease the burden on human workers. Most importantly, technology can improve the safety and quality of life for human workers, and thereby enable us to improve productivity and utilize our full potential.
The coronavirus outbreak is one of many environmental, social, and health crises businesses and people will face in the coming decades. Adopting AI-enabled automation, robotics, and other cutting-edge technologies will help us be more prepared to overcome them.
As the world grapples with the tragic loss of human lives, and as scientists work toward understanding how to flatten the curve of COVID-19 spread, economists are struggling to measure its potentially profound impact on economic activity as markets attempt to find their footing. Financial institutions are grappling with the immediate cash and liquidity demands. For those that withstand the short-term impacts, the widening spreads are foreshadowing the medium- to long-term challenge: mounting credit losses. The first credit defaults have already occurred with Valeritas Holdings, a medical company, filing for Chapter 11 on February 10th, citing supply chain disruptions linked to the Coronavirus (COVID-19). They highlight unanticipated downstream impacts: weak credits felled by supply chain disruptions caused by Coronavirus. What does this mean for credit portfolios, and what are the implications for banks and their ability to navigate through these tumultuous times?
Our experience through the great recession provides a partial sense for what to expect from first quarter earnings, which will be reported under CECL by some SEC filers in mid-April. The great recession provides an important benchmark in actual losses, but not in balance sheet reactions to changing loss expectations. At that time, banks reported allowance under the less reactive incurred model that is inherently backward looking. Adoption of CECL is intended to allow expected changes in the credit environment to immediately impact reserves, thereby increasing the ‘cushion’ for future credit losses. If the CECL model works as intended, many banks and other financial institutions will experience pronounced increases in allowance as forward-looking models that feed into CECL react to the expected credit environment deterioration. This will ultimately lead to reduction in earnings, prior to the manifestation of credit events.
With this in mind, it is also important to consider the cross-sectional impact of COVID-19 outbreak. Consider impact on businesses that rely on physical proximity of their customers like hotels, restaurants and transportation segments, and impact of reduction in tourism and business travel with airline passenger travel ground to a halt. Supply chain disruptions are impacting operations, in particular those that rely heavily on China, Italy and now Spain and France. And, of course, luxury brands are taking a hit as consumers pull back on discretionary spending. Energy, and oil segments have been hit, with a drop in oil prices reinforced by Saudi Arabia’s move to further cut prices. These dynamics will naturally have negative reverberations in their relevant commercial real estate markets. But, performance is not all negative, with expectations of segments such as pharmaceuticals, food and beverage, and medical services are reasonably resilient to recent events.
Recognizing the wide cross-sectional variation across credit market segments, banks and other credit market participants can experience wildly different earnings impacts in the coming quarters as COVID- 19 plays out. Banks must now incorporate their forward looking indicators into CECL models, and are incented to increase required rates on assets that attract a higher level of allowance under the CECL lifetime expected credit loss models. In some cases, they may pull out of deteriorating lending segments altogether.
This is the first materially deteriorated credit environment since CECL adoption. While signs point to a pullback, Federal Reserve action and Federal and State stimulus will offset some of the impact; the speed at which banks react is yet to be seen. Importantly, CECL standard is principles based (as was incurred loss), and the ways in which economic forecasts translated into credit loss allowance under CECL will differ from firm to firm. But with organizations managing their portfolios to numbers the market ultimately judges them against – allowance, earnings, and their volatility – it is likely that banks will shy away from, or more aggressively price, deteriorated segments than in previous downturns. This is reassuring as it can ultimately contribute to a more stable financial system. After all, the CECL measures can be used to inform and improve lending standards. For organizations that actively monitor cross-sectional dynamics, and manage credit portfolio diversification, these measures can facilitate in steering their portfolios to minimize volatility in expected credit losses. Therefore, CECL adoption has the potential of mitigating a credit crisis seen during the great recession partially caused by continued investment in segments who’s credit has deteriorated.
Market dislocations caused by COVID-19 will serve as the first real test of the CECL allowance model. Q1 and Q2 results from lending institutions will highlight the changing credit environment, largely driven by the COVID-19 impact on the economy. However, we still don’t know the extent to which CECL will impact lending, potentially resulting in a pullback in the short-run, and possibly accelerate entry of new players in the credit market down the road. There are also many levers that are being discussed now that need to be monitored more carefully by policymakers as the Q1 and Q2 numbers are released. Programs designed to bolster the functioning of credit markets in segments of greatest need — like those of the Small Business Administration and Federal Housing Finance Agency — will need to be reassessed and perhaps, reinforced as the market works through the transition.