How Covid-19 is Affecting European Banking
by Mashum Mollah Banking 28 July 2020
Since the socio-economic impact of Covid-19 began to take hold, the crisis has been compared to the great financial crash of 2008/09. There are certainly some similarities, particularly in terms of the adverse effects experienced by European central banks.
However, there are also some significant differences, especially when you consider that banking institutions aren’t the cause of the initial problem. Instead, they’re set to play a pivotal role in the subsequent economic recovery across the continent, with the help of sensible regulatory measures and government assistance.
But how exactly have Europe’s banks been impacted by the crisis, and can they really help to mitigate the socio-economic challenges that have emerged as a result of Covid-19? Let’s find out.
How Have Europe’s Central Banks Been Hit by Covid-19?
One of the most likely impacts of the coronavirus pandemic is higher credit losses, which refer to the anticipated losses from delinquent and bad debt that’s likely to become unrecoverable over time.
Obviously, the level of bad or unrecoverable debt has increased markedly as the pandemic has unfolded, with the Bank of England (BoE) in the UK estimating that the value of loan losses caused by Covid-19 could peak at £80 billion by the end of 2021.
While central banks can’t escape such losses, on this occasion they’ve been offset by the various credit guarantee schemes launched by governments throughout the UK and the EU.
Not only are these schemes vital if Europe is to avoid a credit crunch, but they’ll also help to flatten the impact of the downturn on credit losses in the coming months. More specifically, banks will assume approximately 20% of all relevant losses, with the government accountable for the remaining 80%.
The imposition of government-driven forbearance measures (such as mortgage holidays) will also lower credit loss charges. This term refers to expenses that are booked in a bank’s profit and loss account to reflect the risk of non-payment, and reducing these have a dramatic impact on individual balance sheets.
How Can Central Banks Blaze a Trail Towards Recovery?
Fortunately, Europe’s banks are in a better position than they were in the wake of the great recession, thanks to increased regulation and a significant improvement in capital ratios and financial resilience.
While these measures have yet to boost sustained profitability, they have built a foundation that enables banks to help lead the global economic recovery and alter the perception of a sector that has yet to fully recover from the crash more than a decade ago.
As we’ve already seen, the partnership between banks and governments has provided significant economic relief to households and businesses throughout Europe and the rest of the world, while in the near-term we may also see an overdue renaissance of local banks and small businesses.
This will be part of a wider, collaborative, and more global outlook by central banks, which will focus on maintaining robust long-term financial health rather than simply pursuing short-term gains.
This outlook can also help businesses, particularly those who trade across international borders. As a result of this, we’re also seeing businesses create more informed models based on their observations from other countries across the globe while liaising with consultants such as RSM to boost their cash and liquidity and negate country-specific issues.
Ultimately, there’s a great deal to be done in the quest to overcome the socio-economic impact of Covid-19, but it’s becoming increasingly apparent that central banks are well-placed to help lead a widespread and inclusive recovery.