A consistent message from financial regulators post 2008 was that the next financial crisis would look different. Few would have predicted a global health pandemic, coupled with an oil price war, would dramatically curtail economic activity. Yet while banking was not the cause of this crisis, regulators, politicians and the industry itself have quickly moved to do all they can to support the wider economy and minimise the impacts to the banking sector.
It’s worth remembering the financial services (FS) sector as a whole, and banks in particular, face this crisis in a much stronger starting position. Capital levels are materially higher than 2008, with lower debt levels and less reliance on short term funding. Governments and policymakers are instead looking to the banking sector to play a central role in helping individuals and businesses through the disruption. The positive news is regulators and policymakers have recognised the importance of banking to the wider economy and broader society.
A three-way stimulus
We have seen truly co-ordinated action on a range of stimulus measures for the real economy, much of which is targeted at ensuring the banking system plays a central role.
Central banks have lowered interest rates, offered cheap funding to banks for SME credit extension as well as funding schemes that go direct to corporates. There is a clear message from central banks that market and institutional liquidity will not be an issue and banks have a vital role in offering credit.
Governments have offered fiscal incentives to those transmitting stimulus, with unprecedented level of open financial support on offer. The EU has also made clear that any state guarantees by national governments to support banks, while unlikely to be needed, would not be seen as state aid. We are also seeing governments giving a financial stimulus direct to individuals, through payment for workers who lose their jobs. We are even seeing some economists clamour for “helicopter” payments, flat payments to each citizen, with Hong Kong already giving all residents financially impacted $1,200 each.
Regulators have offered several forms of regulatory forbearance, including removal of Counter-Cyclical Buffers and deferral of stress tests, which will all help to provide the playing field on which banks can extend further credit. We have also seen welcome moves to scale back more routine regulatory interactions to allow firms to focus on supporting customers.
We can expect further interventions if regulators, Governments and central banks feel it necessary. For example, the PRA has already started to address concerns around the impact on IFRS9 and the possible impact on banks’ capital and ability to lend.
The challenge ahead – turning stimulus into action
We can expect to see more focus in the weeks ahead on how the banking sector is supporting the real economy. As we saw in the aftermath of 2008, there will be a high level of reputational and regulatory scrutiny in the way banks deal with individuals, SMEs and large corporate customers. The sector has already made positive steps, such as offering mortgage holidays for three months, and ringfenced funds to support SMEs. We have also seen some corporates already fully draw down on their credit lines.
Some of the initiatives, such as commercial paper programmes, offer direct help to large corporates, and ultimately for their employees. Yet there is a clear expectation that banks will be key to the supporting the real economy. By freeing up capital and reducing planned regulatory work, there is a level of expectation on the sector to stand up and help the real economy through this time. There will be real challenges dealing with customers with potentially short term but disruptive cash flow problems. Adding to this complexity is banks themselves relying on remote working and a restricted branch network.
Talking to senior bankers, they are prepared and ready to take whatever action they can to support the real economy. The challenges in transmitting the stimulus to three distinct customer groups – corporates, SMEs and individuals – will be different and nuanced. Banks will need to ensure they work with and understand each segment and be flexible enough to offer different solutions and services as needed. It will be a challenging next few weeks and months, but if done right, banking could regain much of the trust lost post 2008.