The Covid-19 pandemic hasn’t really tested the banks



Banks have had a good crisis, but that doesn’t mean they’re fit for the next one.

On Tuesday, the Bank of England released UK lenders from restrictions on shareholder payments introduced at the start of the pandemic. He mentionned the financial sector remains resilient to much tougher results than their central forecasts, with enough “capital and liquidity to be able to support the economy”.

This follows one-off payments to shareholders announced last month by U.S. banks after a similar easing of guidelines on dividends and redemptions. European regulators were slightly more cautious in their announcement earlier this month: In the euro zone, normal payments to shareholders may resume at the end of the third quarter.

Overall, banks on both sides of the Atlantic have gone through the greatest economic dislocation in many generations without much sign of damage or even some success. The capital cushions are inflated. Provisions for loan losses built up at the start of the crisis have started to reverse in the United States, although European lenders are more cautious. Investment banks capitalized on the market turmoil and reported big trading profits.

But that says less about the health of the banking sector than about the nature of the crisis. Arguably, lenders escaped bailouts primarily because their clients were bailed out instead.

Governments have provided paychecks to households, supported loan repayment holidays, and prohibited foreclosures and evictions. They also funneled funds to a wide range of businesses, from multinational corporations to local stores. These support programs have avoided defaults, given borrowers time to adjust, and even allowed some to pay off their debts.

What he didn’t do was test the banks’ lending standards. Imagine how different the global financial crisis could have been if governments had offered homeowners the same level of state support they had last year.

As a result, the pandemic provides limited information on how bank activity and lending standards will fare in a crisis involving more normal levels of state support. Indeed, European and UK regulators have warned of vulnerabilities to credit risk as the economy recovers and government support programs retract. “Households and businesses are likely to need continued support,” the Bank of England said on Tuesday.

The costly exposure of many large banks to the Archegos collapse also suggests that lenders’ risk assessment procedures may require more work.

Banks are the heart of the economy and have behaved well in a dramatic crisis. But they haven’t really been tested yet.

Write to Rochelle Toplensky at [email protected]

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