Banks have beaten a rapid retreat from their disaster recovery sites after initially deploying key staff there when the coronavirus crisis shut down financial centres, a decision that could be a harbinger for more permanent changes in how the industry works.
The successful bypass of this expensive infrastructure could lead to a revolution in financial markets, with working from home taken for granted, as well as pointing to a potentially bleak future for city office real estate.
"From the front office across to back-office staff, the disaster recovery default will be to work from home," said Sean Taor, head of debt capital markets at RBC.
"The bigger questions are in the longer term: is it more or less productive having staff working from home, and will working from home become the new normal?"
Now, several weeks into the lockdown, investment banks have most employees working from home, with only a few remaining in offices and disaster recovery sites.
Some bankers say it makes no sense for banks and other major institutions to continue paying for sizeable sites that have now been left unoccupied.
"Many banks pay a lot for their disaster recovery sites. Those sites have now got maybe a 5% occupancy rate," said a London-based head of syndicate.
The trend could have wider implications for banks' thinking on real estate usage.
After Barclays reported a fall in first-quarter profits, chief executive Jes Staley said on Wednesday that the bank will not revert fully to its pre-January working habits.
"There will be a long-term adjustment in terms of how we think about our location strategy," Staley said. "The notion of putting 7,000 people in a building may be a thing of the past."
In mid-March, investment banks sent their employees to work remotely at disaster recovery sites when implications of the global spread of the coronavirus started to become clear.
But the approach was soon abandoned as the virus became more widespread and requirements for social distancing meant that moving wholesale to a back-up site was not a viable option. Perhaps more importantly, it was not deemed necessary.
Banks are now starting to consider whether they need non-client-facing staff to be present in the office five days a week, said the London-based syndicate head.
Other non-bank market participants have had the same conversion. David Arnaud, senior fund manager of fixed income at Canada Life, said he had been working from home before the crisis.
"Within a couple of weeks we all got set up and it is working fine," said Arnaud.
"Flexible working is going to be here to stay and I would imagine the office/commercial sector is going to have to reinvent itself. We don't need that much capacity."
NEW NORMAL
The surprise is that markets have been able to cope while bankers have been scattered across cities, syndicating deals at their kitchen tables. Previously, bankers had been told that working from home was impossible thanks to regulatory and technological obstacles.
And it is not as if markets have been quiet. Without impairments to loan books, most investment banks would be looking at bumper profits due to roaring activity.
Capital markets have been on fire throughout April, after suffering a different kind of heat in March amid firesales of most assets.
Secondary trading has provided a boost for banks' markets divisions. TRACE data on US investment-grade activity showed new highs in March, levels that were exceeded in April.
DISASTER RECOVERY
Disaster recovery protocols were based on banks' prior experience of man-made disasters like 9/11, which determined their need to build out remote locations far enough away from metropolitan areas, said Bob Santella, chief executive of New Jersey-based financial services firm IPC.
"The conventional wisdom was that trading from home was a non-starter," said Santella.
"But as each week went by, plans changed fairly rapidly as banks realised that the issues they had with primary offices would be exactly the same in their remote locations."
It has proven a boon for IPC, a leader in communications turrets for traders – especially voice – and the associated networks. As the crisis picked up steam, IPC deployed 10,000 of its trading kits - and banks started to think longer-term.
"Banks are starting to realise that the trading floor will not look the same as when they left," said Santella.
Companies are now thinking about instituting some form of social distancing on the trading floor, moving traders six to nine feet away from each other, said Santella. That will have an impact on both floor density and capacity.
GETTING REAL
Real-estate investors say they are now scanning their portfolios for potentially unfavourable lease terms.
"The structural changes will take time to play out and it remains to be seen how significantly and how quickly the demand for office space declines," said another investor.
"Either way, it is likely to put upward pressure on yields, and downward pressure on rents in this asset class. It will become increasingly important to differentiate between issuers based on weighted average unexpired lease terms," he said.
In general, UK real-estate issuers are in a more favourable position than their European counterparts as average lease lengths are generally quite a bit longer, he said.
How behaviour and the use of real estate will change after the lockdown is lifted is "the key question that everyone is thinking about but no one has the answer to", said Vincent Noble, head of real estate debt at Federated Hermes.