Banks have a chance to redeem themselves by supporting both business and retail customers during the Covid-19 crisis, writes Brian Caplen.

The economic impact of coronavirus threatens to make the financial crisis look like a minor event. The combination of large falls in GDP, loss of tax revenues, the cost of government financial packages and despite that, the inevitable closure of businesses, mean that budget deficits and debt-to-GDP ratios will balloon.

Banks will also be under pressure and loan losses may rise three to four times. At the same time this is an opportunity for banks to recover their reputations that were so badly trashed in the financial crisis. Then it seemed as if ordinary people paid the cost of banks’ mistakes – through higher taxes and job losses – while bankers walked away with their bonuses.

In the current turmoil, banks can demonstrate that they really are on the side of their customers by granting repayment holidays on mortgages and business loans. Indeed, governments are now guaranteeing the banks to do just that but the more proactive the banks are, the more they will be able to hold their heads up high after the crisis and declare that this time they were a force for good.

In this context, it was heartening that in the UK two of the banks that had to be bailed out in the financial crisis – Royal Bank of Scotland and Lloyds – were ahead of the curve in their efforts to support customers.

The good news is that banks are carrying sufficient capital to enable them to deal with the crisis. They should use it effectively by prioritising customers and the well-being of the country over paying dividends and bonuses.

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

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