The current health crisis will lead to increased losses on bank loans. Against this backdrop, do banks have sufficient resources to withstand declining revenues, or even outright losses if the situation worsens? Here are some answers.
Colossal potential losses for banks
With many European countries under lockdown, economic activity is under pressure. According to information available as of April 23, 2020, business activity in France is down 35% on a normal situation, according to INSEE. The health crisis is having a major impact on the banking sector, weakened by the non-repayment of loans and the fall in financial markets.
Medium-sized institutions such as CIC and the regional mutual banks are directly affected by repayment defaults. Large groups such as BNP Paribas and Société Générale remain particularly exposed to losses on the financial markets, due to their corporate and investment banking (CIB) activities. According to Goldman Sachs figures, European banks could see their combined net income fall by $34 billion over the next three years as a result of the coronavirus pandemic, representing a 7% drop in profits over this period.
Accompanying measures proposed by the government
To preserve the banking sector, the European Central Bank has announced a support plan. On March 12, the institution announced that it would be releasing 120 billion euros to boost credit. However, this measure did not have the desired effect on financial markets, which continued to plummet. The ECB therefore reinforced its emergency plan with a further 750 billion euros. The plan also includes granting commercial banks long-term financing operations to encourage them to continue lending to households and businesses. Many experts consider these measures necessary, but insufficient, and are calling for direct distribution of money to those in need, without going through the banks, or for a major budgetary effort on the part of governments.
At the same time, the government has introduced a state-guaranteed loan scheme (PGE). Its launch enables all French companies to meet cash-flow requirements in difficult circumstances. Thanks to these loans, the State can finance up to 300 billion euros, equivalent to 15% of France's gross domestic product.
Despite the difficulties they face, the banks are "in a solid situation", according to the Governor of the Banque de France. They have a considerable amount of accumulated equity compared with the 2008 crisis. In view of the proposed support plans and their favorable liquidity situation, they should therefore be in a position to cope with the financial crisis generated by the Covid-19 pandemic.