While the current crisis and that of 2008 are different in nature, both entail the risk of major economic paralysis. Banks are on the front line in combating the effects of the coronavirus pandemic, and must fully play their role as lenders.
Banks allowed to reduce their capital buffer to zero
On March 12, the European Central Bank (ECB) took the crucial step of relaxing the capital requirements imposed on banks. This swift, collective decision would not have been possible without the existence of theBanking Union. Built by European countries in response to the 2008 crisis, the European Banking Union rests on four main pillars: uniform regulations, a single supervisory mechanism, a single resolution mechanism and the European Deposit Guarantee Scheme.
Specifically, the ECB has authorized banks to operate temporarily below current capital and liquidity requirements so that they can "continue to play their role in financing the real economy".the statement said. The banks' "counter-cyclical" capital cushion has been reduced to zero, a move which Bercy believes will inject nearly 8 billion euros into the economy.
An emergency plan to contain the impact of the pandemic
To limit the effects of the current health crisis on the economy, the ECB has announced a €750 billion emergency plan to buy back public and private debt. This emergency repurchase program, to be carried out by the end of the year, is in addition to a €120 billion package released on March 12. By buying up government and corporate debt on a massive scale, the European Central Bank hopes to relieve the banks and support production and employment.
For its part, the US Federal Reserve (FED) went even further than in 2008-2009, announcing at the end of March that it would buy back all kinds of government debt without limit, and was also preparing to buy back the debt of US states, local authorities and private companies.
In China, the People's Bank of China (BOC) surprised everyone by lowering its 7-day reverse repo rate from 2.40% to 2.20% on March 30. These rates are applied by central banks to supply commercial banks with liquidity via short-term repurchase agreements. This announcement comes at a time when the pandemic seems to be slowing down in France. Indeed, for the first time in 3 months, as of April 7, China had not recorded any new deaths from Covid-19 in the last 24 hours.
Given the unprecedented measures put in place, there is every reason to believe that commercial banks are sufficiently robust to carry out their mission and cope with the coronavirus pandemic.