Banks, from problem to solution
The Great Recession
Twelve years ago, the world entered a severe financial crisis. The Great Recession was a fact. Banks had done their devastating work with unbridled lending and risky investments in the hunt for even greater returns and profits. Their failing policies contributed to a wave of bankruptcies, unemployment, economic contraction and sharply lower house and share prices. Authorities around the world had to take firm action. In order to save the economy, the banks had to stay afloat. Contrary to the population’s sense of justice, large amounts of taxpayers’ money flowed into the banking system worldwide.
Twelve years later
Balance sheets were strengthened, regulations were tightened and unrestricted lending was curbed. Banks survived, but at a not inconsiderable price. We are now 12 years on and the world is once again in the grip of a crisis. This time the threat comes from outside, but once again the financial system is being tested to the limit. Global lockdowns have shut the economy down everywhere. The economic damage is on an unprecedented scale.
With fiscal and monetary policies of unprecedented proportions, the authorities around the world are trying to save the economy from total collapse. Although the money comes from the central banks and the taxpayers, the banks are crucial in these operations. They are the necessary link through which the money finds its way to the affected businesses and citizens. The credits are directly or indirectly guaranteed by the state.
From cause to solution
Of the cause of all the misery in 2008, banks have now become part of the solution. However, in order to fulfil this role, their resilience is being tested more than ever. Because get on with it. They already have their backs against the wall because of historically low interest rates and increasingly far-reaching government regulations. The economic contraction is also expected to break post-war records this quarter. Companies will go bankrupt, repayments will not be paid, people will lose their jobs and will no longer be able to pay their mortgages. Banks are now in the process of making their provisions, but the uncertainty about the virus raises strong doubts whether it will be sufficient.
Of course the banks are much better off than 12 years ago, but are they strong enough? Investors think it’s theirs to witness the sharply declining stock market prices of bank shares. Dividend payments are being withheld. Poach pots filled to the rim. Credits are guaranteed and rules relaxed. Last week, the European Central Bank took another measure to support the banks in their serving role. Banks that provide targeted credit to citizens and businesses can borrow from the ECB at an interest rate of minus one percent. There will also be pandemic loans for smaller banks, without special conditions.
These negative interest rates are in fact a direct subsidy to the banks. According to the ECB, no less than 3000 billion euros in loans will become available to banks. It is a form of monetary policy that other central banks – such as those of the United States and Japan – have not yet dared to implement. Clearly, this crisis is being fought too hard and the banking system is the weapon with which the authorities will fight the enemy – an economic collapse.
Are investors wrong
The stock market prices of, for example, UBS and Credit Suisse show that investors do not yet have that much confidence. They could be mistaken about the firmness of the authorities and the resilience of the banking system. In any case, that’s what we assume. We have to assume that, or rather. Because otherwise there is a chance that this crisis will turn out to be something more than a Great Recession.