Banks need to switch from being profit maximisers to carving out a new role working with government to rebuild economies.

After the bank bailouts of the financial crisis, regulators went to great lengths to ensure that in future banks that got into trouble could be resolved without recourse to public funds. Little did anyone expect that in a future scenario, such as the Covid-19 one we have now, entire economies would be bailed out by the state.

With governments now involved in the economy in ways that are unprecedented for decades (since the rebuilding after the second world war), banks need to adjust to this new normal. They need to align their business strategy with their governments’ post-pandemic recovery strategy. This may mean working much more with the public sector in channelling credit to new areas of social importance such as environmental and health projects.

Banks will still be expected to make profits but profit maximisation cannot be their sole aim as was the case prior to the financial crisis. In the new world, banks must construct a strategy that serves a range of stakeholders as well as the wider public good.

Anyone who doubts this argument that the state is here to stay should consider the role of central banks since the financial crisis. Low interest rates and quantitative easing were supposed to be temporary measures. A decade later, central banks are so involved in the markets that credit investors and banks need to take account of this fact when making investment and counterparty decisions.

In a recent report, Sam Theodore of Scope Insights says that “a European new normal could be that capital market issuance, investment, and trading decisions remain influenced by the knowledge that powerful central banks are willing and able to support issuers and the market by purchasing debt securities on a large scale, even approaching monopsony. Which in fact could be as relevant as a government bailout of the issuer.”

For most bankers who have grown up with the idea that small government works best and markets should take the primary role in economic development, adjusting to this new environment will be challenging. But the quicker they change the better for ensuring their institutions are in the vanguard of the new model. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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