Atlantico (France): shall we expect a new financial crisis? Coronavirus shed light on the fragility of many European banks

“Atlantico”: covid-19 was a test for European banks. He pointed out to the fragility of the banking system?

Olivier Meyer: the Global pandemic сovid-19 was a heavy blow to all national economies, in particular Europe and the USA. IMF predicts global recession of 3% in 2020. Our eyes is one of the largest stock-exchange crisis comparable to the great depression of the 1930-ies and the mortgage crisis of 2007-2008, with the decline of productive investment, the rise of unemployment (the loss of hundreds of thousands of jobs), bankruptcies in industries with high international competition, such as energy, automotive, aviation, and even symbolic in such sectors as tourism, catering business and culture. Coronavirus crisis plunges the world into the unknown, forcing European States to allocate billions of euros in an attempt to save from bankruptcy the key enterprises (Renault, Air France, KLM…) and ensure the recovery of the national economy.

The crisis will entail serious consequences for the European banking crisis, at the level of capital and profits, in particular in regard to loss loans, while the governments take measures to limit their magnitude. I mean in particular the deferral of taxes and rent, the provision of guarantees. Banking sector crisis is quite real. For example, Société Générale and BNP Paris Bas very seriously affected by the spread of the crisis in Europe, their stock quotes times in a row. Anyway, the scale and severity of effects depend primarily on government policies and duration of the crisis, whose shape and characteristics are today difficult to evaluate. A deep recession can be a severe blow to the profits from operations, and in the long term to profit from interest rates. This will entail a structural weakening of the European banks and in particular financial institutions that spetsializiruyutsya on credit and depend on the situation in certain industries, e.g., oil.

Michelle Ruimi: the banking crises have the property that they occur at the time and in the place where they are not welcome. Coronavirus crisis is no exception. Anyway, unlike the mortgage crisis and the Eurozone debt crisis, a banking institution, apparently, is better prepared by strengthening their capital and liquidity, which is continuously conducted with the financial crisis of 2008.

Regarding activities in the framework of the economic support measures from the government and European authorities, the banks quickly began active work on provision of funds of enterprises, whose activities came to an abrupt end due to isolation and decisions on their administrative closure.

Anyway, they are expected to participate in the recovery of the economy after the lifting of restrictions. Do they have sufficient stability to keep a job in the economic environment, which can experience prolonged and large-scale perturbations, in spite of all recovery plans, in terms of risk of bankruptcy of a large number of enterprises? Therefore it is necessary to increase the interest rates on loans, even if banks get a government guarantee.

In the future, Supervisory authorities will need to address a number of “structural” problems in the banking sector. For example, they will need to consider the implications of low interest rates when assessing the amount of own funds and risks. You should analyze your scenario, persistently low interest rates and to estimate the strength of the commercial models at that angle. Finally, they should vigilantly monitor the situation to prevent the accumulation of excessive risks that could impact on the stability of the entire banking sector.

— Sanitation crisis might cause a new financial crisis?

O. M.: peculiarity of the current crisis lies in his nature, as it contains a sanitary, social, and psychological components (effects on human health: disease, death, potential complications, in some cases), as well as economic and financial aspects. For a better understanding of the oddities of the current crisis should be compared with what we experienced in 2007-2008. The mortgage crisis was a shock to the financial system and all its components. It was primarily the banking and financial crisis resulted in the bankruptcy of credit institutions and investment funds. All this was in particular financial practices in the field of mortgage loans with a high degree of risk. At the same time, the current crisis is global in nature and can be seen in a few months a total stop of the economy and the closure of certain areas (some still not resumed work, for example, the entertainment and night clubs) for regulatory reasons.

Unlike other crises, the current difficulties of enterprises are not the result of strategic or management errors, but a result of external factors of a regulatory nature (permits for movement across the country, closures, full or partial isolation, social distancing…). I mean, we are talking about the global crisis of external nature, which strikes at the same time for the consumption, production, distribution, and public Finance (aid to enterprises underemployment, government loan guarantees, stimulating investment in the company). Today we are dealing with an unexpected and severe world crisis that affects us directly and personally (the closure of schools for millions of children, new teaching methods, the spread of remote work…), and whose economic (recession), health (disease and complications) and social consequences (relationships with people, unemployment and bankrostva) can persist for years and even lead to a revision in our approaches, in particular in the field of health and safety. If the crisis will be stable, this may limit the ability of the weakest banks (we are talking about capital flight and the unwillingness to work with the hardest affected industries). This situation may push companies to reconsider their economic model.

M. R.: the outbreak of SARS in 2003 resulted in a massive withdrawal of liquidity, in contrast to the economic crisis of 2008. The current crisis is mixed: it has arisen for sanitary reasons, but external circumstances have given him economic dimension. Should I wait for the withdrawal of funds from banks? From the comparison it can be concluded that when the economic crisis with health roots of such an outcome less likely.

Anyway, because of its unprecedented nature, the crisis could generate a new script. As in any crisis, it is necessary to take into account the psychological element of fear that plays the more prominent role that we are dealing with new virus. Seeking to reassure people the statements of the authorities and economic leaders can’t erase the memories of previous crises. Nobody can hold in check the psychosis of investors and Bank customers…

The script itself is a massive withdrawal of capital from covid-19 should not lead to bankruptcy of banks. However, the combination of external elements and impulses of panic can tuck contributors to massive withdrawals in a short period of time, although their prudential standards and has been increased since 2008. Basel has established different liquidity ratios in the short and long term, which should help banks to cope with a potential liquidity crisis if he doesn’t last more than a year.

European banking system can withstand the impact of the coronavirus?

O. M.: In comparison with the 2008 crisis, European banks are better prepared thanks to the reforms. They have a strong position with high market capitalization and substantial liquidity reserves. In addition, the authorities adopted exceptional measures to support certainly helped to mitigate the effects of coronavirus crisis for the real economy allowed the banking sector to more effectively fight the pandemic tension.

But the resistance (mitigation of losses, deferred dividends increase in reserves in case of risk) is one thing, but long-term revision activity and means of financing entirely different. It really depends on the duration and uncertainty of the crisis, which is complicated by logical and rational analysis (this is not seen for the last time).

The real problem is that the best option for all would be the separation of the sanitary situation from the economic and financial aspects, whose cumulative effects (the decline in consumption and investment, the deterioration of the psychological state of people, the risks, the loss of faith in the future, the General slowdown of activity…) give the current crisis a very special character. I wish we could somehow return to a more relaxed atmosphere, removing the pressure from families (couples, children, older generations), medical and logistics (ambulance, firefighters, police officers, taxi drivers) with the help of an effective vaccine or treatment.

In purely economic and financial terms, no government has at the moment a clear strategy. Authorities have to balance between economic realism and sanitary security, economic recovery in transport and energy and support the most vulnerable segments of the population (youth, unemployed, elderly people), budget control and financing policy, the Authorities should ensure the provision of assistance and the creation of jobs, in parallel, to convince people optimism with new projects, which would include all parties. Crisis should return the meaning of the European construction and the interest in it, what can be achieved by betting on “organic solidarity” with respect to national cultures, as well as specific collective decisions on major public issues (health, environment, employment, science…).

But if the current crisis will persist after 2021 and will demonstrate the inability of States to cope with it, it could destabilize the big European banks, and also lead to revision of the banking system for Deposit protection.

But hopefully, by the time we get to resolve this sanitation crisis and collectively to restart the economy.
M. R.: since the financial crisis of 2007, the profitability has become a perennial problem of banks of several developed countries. Although soft monetary policy was very important to maintain economic growth, extremely low interest rates have limited room for maneuver for banks. A steady continuation of this trend could further hit their profitability in the medium term. However, their health is extremely important for financial stability and is an important parameter in any economic dynamics: if the banks are unable to profit, they would be less willing to provide loans and other financial services to businesses and individuals that will deprive the economy is so important to her credits.

Sanitation crisis has become a new durability test banks. The government realized that the banks are part of the solution. It is therefore important to reduce systemic risks and increase the resilience of Bank capital. Need to consider different strategies for the preservation and extension of own funds of banks, including the limitation of dividends and share buybacks.

However, we still remain areas of risk, such as Greece, Portugal and Italy. It is therefore possible that an unstable Bank may be in a difficult position. The ECB and national structures following this, through a single Supervisory mechanism and ready to act through a single mechanism, settlement.

In addition, it is worth noting bole is important, but remaining unnoticed by the decision. March 20, 2020, the European Commission noted that if the Bank will need state support because of the coronavirus, rules for its granting (the usual time they mean losses for shareholders and creditors) to apply is not required. A big change compared to what it was, for example, the recapitalization of the Italian Bank Monte dei Paschi. Thus the European Commission is showing pragmatism and provides States with the old capabilities in the field of financial aid if they want it or need it.