In the financial crisis of 2008, banks failed to show a supportive, caring side to the wider society. They can and must make amends as the world fights against the coronavirus pandemic.
The world has seldom faced such a sombre and serious outlook in peacetime. Like all major crises, the onslaught of the coronavirus pandemic was unplanned for and has left governments struggling to catch up with policies and allocation of resources.
The first concern must be for the fatalities that are rising every day and with no clear indication as to when this might stop. There will definitely be many more thousands of deaths, most probably tens of thousands and, possibly, hundreds of thousands or even millions. The Banker sends its condolences to all those affected.
Human factors such as these put the economic consequences of the pandemic into relief, at least, in the initial analysis. But on top of the human cost, the economic damage is going to be so considerable that the survivors will be paying for it for years to come.
Right now, economists have no idea what this cost will be. The biggest unknown is when the crisis will end – in three months, six months or more than a year? Most big companies and banks can survive a short shock but the more it stretches out the more of them will find themselves in difficulties.
Governments are responding with loan guarantee and wage support programmes but they, too, could find funding themselves difficult in the long run. If their only option is to print money, inflation has to be a concern.
What is certain is that economies will contract in double figures, budget deficits will balloon and debt-to-gross domestic product levels will rocket to the hundreds of percent. Countries in poor fiscal condition going into the crisis, and which experience the worst effects of the pandemic, will suffer the most, Italy being the prime example. Countries in better shape, such as Germany, need to put their fiscal resources to work, as quickly as possible, if the eurozone is going to survive.
A supportive role
For banks there is a real opportunity to support customers, employees and societies in a way that was lacking during the financial crisis. This is their moment to recover from the reputational damage done last time when they were seen to be the cause of the problem but with the bill being picked up by everyone else.
Banks will feel the pain of the pandemic in terms of rising non-performing loans and lost revenues, but they are also getting government and central bank support from the loan guarantees, the liquidity measures and forbearance on capital requirements and stress tests. They must respond positively.
They must start by ending all bonuses and cancelling dividends so that the resources of the bank can be focused on helping both retail and business customers with mortgage and loan holidays.
Banking associations should also step up to the plate by co-ordinating measures where they don’t fall foul of competition rules and by putting out an industry message about what is being done.
A different future
As with all crises, the coronavirus outbreak begs the question as to what reforms and changes should be put in place once this is over. After the financial crisis, a lot of reform was done to banking regulation, but in the wider economic and social sphere almost nothing was done. This time needs to be different or the rise in populism in Western countries will mutate into something much uglier.
Raising taxes and reducing avoidance by international companies, especially tech companies, would be a good place to start so that they pay their fair share of the costs. But there are bigger issues to be addressed such as climate change and the related issue of how production and supply chains are organised.
A locked-down economy is a climate-friendly one but it is not very enjoyable or wealth creating. The issue to address is how economies can be reorganised with a more circular production system that takes account of use of resources and recycling from the outset. The old system whereby production was centred on the lowest wage economy (China, Bangladesh, Vietnam) and everything shipped out of there has shown its weaknesses in the current pandemic.
The advent of artificial intelligence, the digital economy and 3D printing opens the way for a better distribution of production, and critically jobs, between countries that is less distorting and spreads the economic benefits more widely.
These are radical ideas and should not be seen as an affront to globalisation, which in spite of its critics has lifted millions out of poverty. But a reformed and more climate-friendly globalisation would help to alleviate the economic costs of the pandemic while acknowledging that nothing can ever mitigate the human cost.
