During the pandemic, they have done their job. And more than just that. By paying out the state-guaranteed loans, the expected bankruptcies will leave them exposed.
In 2008, the failure of the banking system caused the collapse of credit and sparked the risk of global deflation. This was only warded off by means of a global rescue plan that involved over $5,000 billion and by a recovery program that deepened the public debt of developed countries to the tune of about 20% of their GDP. The banking crash therefore created a sovereign risk crisis that almost broke up the euro zone.
Less than 12 years later, developed countries are once more finding themselves obliged to commit 20% of their wealth (in the form of public debt) to avoiding the collapse of their economies. But the situation has been reversed. It is the public authorities who, by deciding on a lockdown for over half the world’s population in order to check the Covid-19 epidemic, have caused the most severe recession since the 1930s. Whereas the banks were the problem in 2008, they are part of the solution in 2020. They have helped prevent the economy and society from disintegrating during lockdown. They have become the preferred instrument in policies to support businesses and relaunch investment. But, because of this, and because governments are making the banks responsible for some of the risks involved in providing loans open to businesses that are liable to become bankrupt, the banks are highly exposed.
During lockdown, the banks never failed to carry out their task, contrary to numerous administrations. By keeping 90% of their branches open, by ensuring the continuity of payments, by providing companies with liquidity, and by paying out state-guaranteed loans – in France, on 12th June, these amounted to 101 billion euros with loan refusal limited to 2.6% –, they prevented the healthcare crisis from becoming a financial one. At the same time, banks speeded up innovatory measures to match the surge in digital transactions and contactless payments. Finally, and in contrast to the public healthcare system, the financial infrastructure proved its resilience: the clearing houses were never faulted; market liquidity was guaranteed, even when the markets plunged. Better still, while international tensions flamed up, the central banks strengthened their cooperation, extended their swap agreements and prevented any interruption to the exchange market.
The role of the banks appears to be just as crucial in the success of any economic recovery, for this depends on credit once again being available. For households, who have accumulated almost 100 billion euros of forced savings, it is a precondition for the revival of consumption and the future of the real estate market. For businesses, it is the only thing that can stop the fall in investment – estimated at 40% – that could signal the definitive downgrading of the French production base. Above all, the banks will be a determining factor in enabling the member states and the European Union to raise the huge debt needed to finance the recovery plans. France, for example, will have to raise between 700 and 800 billon euros in loans in 2020.
Up to now, the banks have held good, whilst paying a high price to the epidemic, for, on average, their worth has been halved since 2019. But they are up against a double wall: the two waves of company bankruptcies expected in autumn 2020 and then in early 2021; and the risk that the state-guaranteed loans will not be repaid, loans for which the banks bear at least 10% of any losses.
The banks have the support of the ECB, which has just opened an envelope of between 1,000 and 1,500 billion euros of long-term loans at a -1% rate, in order to enable banks to recover their margins. But the question of how to treat the massive losses that are expected on the guaranteed loans has not been resolved. Governments are ready to do anything – including dismantling the arsenal of regulations that was set up in 2009 – in order to transfer a sizeable share of the risks to the banks. However, the banks cannot withstand this, particularly in Europe where their strength has been sapped by negative interest rates and by the increasing number of regulatory constraints, taxes and fines.
The banks’ vision of things – a legacy of the 2008 crash – is changing profoundly because of the historic crisis triggered by the pandemic.
- Not only is financial brokerage not dead, but the banks have shown that they provide an essential service whose continuity is vital for countries’ resilience.
- Financial innovation is not the exclusive property of start-ups and can be developed and propagated by traditional financial institutions.
- Banks are not only the main staging post of monetary policy but also the main instrument used in recovery strategies and in support for businesses when the economy collapses.
- However, they neither cannot nor must not bear the cost of measures decided on by governments to support businesses.
- In order to protect its sovereignty and to relaunch its economy, grounded in the digital revolution, ecological transition and security, Europe must include banking among the strategic sectors that should be protected, and speed up the creation of a banking union.
(Article published in Le Point, 25th June)