Can banks weather this storm? Sponsored by KPMG
The COVID-19 pandemic crisis has dramatically gathered pace in recent days, with fresh developments almost by the hour. Many countries have declared national emergencies and are fighting to contain the virus’ spread.
As of March, central bank actions have been decisive and significant. The Federal Reserve in the US has slashed interest rates by a full percentage point to effectively zero and launched a US$700bn package of quantitative easing . The European Central Bank cut rates and extended its QE program in September, however didn’t follow the FED and Bank of England with further cuts as of March 12th.
I believe these are the right and necessary measures – but they could come to test some banks’ capital strength. The ultra-low – or even negative – interest rate environment that has been created means margins are now extremely thin. Around two thirds of most banks’ income is derived from interest. We have already seen banks in Europe constrained by the low interest rates that have prevailed there for some time.
All of this said, measures taken since the global financial crisis should allow the sector overall to “weather the storm.” Specifically, the tougher capital requirements that have been introduced and the stress testing regimes that regulators have implemented allow the banks to withstand a crisis much better than 10 years ago.
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