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Banking as a matter of life and death

Those of us who lived through the global financial crisis of 2007/08 and its aftermath never imagined we would experience anything like it again. As the coronavirus outbreak threatens the very fabric of our economies and our societies, we should be very grateful that we did.

Consider for a moment if we had suffered the economic and financial shock of today back in 2007. Banks would have had no capital or liquidity buffers to withstand the shuttering of markets. The banking system would have collapsed.

Today, the measures taken by the industry and by regulators to prevent a repeat of the financial crisis are keeping the banking system afloat.

But the reasons to be thankful go further than that.

In 2007, banks were the cause of the crisis. In 2020, they are an intrinsic part of the solution.

The relative safety of banks allows them to fulfil a new – hopefully short-term but absolutely vital – role as the transmission system for the extraordinary measures taken by governments around the world to support their populations and their economies.

As one top global bank chief executive told Euromoney in late March: “Our industry is proving itself – which many of us never doubted – to have an essential social purpose, and we must live up to this responsibility. It is interesting to note that our services are deemed as ‘essential’ by even the most sceptical governments at this time of crisis.”

Or as another bank chief puts it: “We are part of the transmission mechanism, integral to keeping the economy moving. That is our role today.”

Lessons learned

Other lessons have been learned from 13 years ago. Chief among them is how the US economy – where the problems started then – recovered much quicker than the rest of the developed world. That was because of the sums the US government quickly threw at the problem, while places such as Europe dithered and prevaricated.

Not in 2020. The central bank funding taps have been opened wide, core markets such as commercial paper are being kept open and governments are doing whatever it takes.

Banks should not be complacent. This may not be a financial crisis today, but it will almost certainly become one in the future if economies remain shut 

For the moment at least, let’s not worry too much about the long-term consequences of all this government debt.

“Governments are doing amazing things,” a senior investment banker says. “I don’t know whether they are amazingly good or amazingly bad. But they are certainly amazing.”

Banks should not be complacent. This may not be a financial crisis today, but it will almost certainly become one in the future if economies remain shut and contract by 15% or more in a single quarter.

New challenge

If banking is at core about risk management, then the Covid-19 crisis presents a new challenge. This is not about financial risk, it is about health risk. Bankers and their algorithms don’t know how to model that. Right now, neither do the world’s leading epidemiologists when it comes to predicting the path of this virus.

So bank chief executives should plan for the worst. And the logical conclusion to that is they should first and foremost protect their capital whenever they can.

That means deciding right now that they will suspend dividends, stop share buybacks and cut senior staff bonuses. They should not wait for someone else to tell them to do so.

This is a new world in which old mechanisms and thought processes do not apply 

This is a new world in which old mechanisms and thought processes do not apply.

It means supporting their staff and their customers in ways they might not have been prepared to – or even imagined they would have to – in the past. It will probably mean working together at times, coordinating approaches to clients and presenting a united and constructive front to governments and regulators.

It will mean, for the time being at least, not worrying about profitability, returns and all the other data points that have come to define banking over many decades.

Too often in the past, bankers have vastly and almost comically overplayed their own importance and the impact of their deals, forgetting or ignoring the true role of banks as agents of societies and economies. And now that role is more important than ever.

We leave the final word to one leading European bank chief executive: “This is not a matter of return on tangible equity. It is a matter of life and death.”