Caution is key as banks look to rescue their reputation

This time round, banks are not at the epicentre of the crisis. Some people have even suggested they are right at the heart of the solution. But if the industry is serious about regaining communities’ trust after the damage caused during the global financial crisis, it must navigate the coronavirus pandemic with care. 

In reality – however enthusiastic some may be, and despite being able to offer important solutions – the banking industry is unlikely to transform from sinner into saviour. First of all, it would be unfair and undesirable to set unrealistic expectations on what banks can do to prop up the economy. In a crisis of this magnitude and nature, this is ultimately the job of governments. And there are other considerations.

While emergency credit lines, the removal of stricter covenants and the offer of repayment ‘holidays’ do throw struggling businesses a lifeline, those loans will still need to be repaid. Whether companies can do so depends on the strength and speed of the economic recovery once the worst of the pandemic is over.

Additional loans that bridge an emergency today may end up pushing borrowers under if that crisis turned chronic. Are banks willing and able to forgive or heavily restructure that debt? And how many bad loans can banks absorb before they, too, begin to suffer?

Regulators both in the EU and the US have eased off rules, to enable banks to lend more. And they should lend more – but finance needs to be accompanied by a long-term strategy, for both bank and client, that evolves as the true impact of the crisis becomes known.

Now, more than ever, banks should focus on supporting their communities and preparing them for what might come next. Attempting to redefine corporate risk and nudging businesses in that direction is one example. Some lenders are already doing so, but even more attention could be placed on helping clients figure out what the post-Covid-19 world will look like, and what the long-lasting changes are likely to be in terms of demand, supply chains and consumer behaviour that will threaten or reward their business models.

Lenders should also continue to share the heat. Meaningful pay cuts for top earners (starting from the CEO) to avoid staff cuts are wise decisions that some have already taken and that set the right tone. Rather than aspiring to be saviours, banks should simply aspire to be good corporate citizens.