In this article, we are going to critically analyse the financial and banking industry to see if it has what it takes to avoid a financial meltdown due to the COVID Pandemic.
A little over a decade the globe experienced a financial crisis. Over the last few months, the level of unemployment across the globe dwarfs unemployment during that entire global financial crisis. These unemployment numbers are only going to increase.
More than 2 billion people in the world have gone into a self-imposed or government-mandated lockdown. At the time of writing this article, the world population clock states the globe’s population at 7.8 billion.
55% of the world’s population is urban and 85% of the world’s job market can be found in urban centres.
This effectively means half of the world’s urban force are in essence unemployed (barring a percentage that can work from home).
The banks print money
As reserve banks around the globe are printing trillions in their respective currencies to make sure that banks are able to maintain the flow of cash. Banks around the world are employing different strategies but the most common seem to be offering consumers loan repayment holidays. Many Bank’s employing this strategy in Europe still haven’t fully recovered from the 2008 North Atlantic Financial crisis, where Central Banks deployed the same printing strategy to prop up liquidity.
America at crossroads
The US is also at a crossroad. The current administration reduced the amount of cash banks need to keep in reserve to cover losses before the pandemic drop kicked the globe in the face. Wall Street Had Cut 68,000 Jobs and received trillions in emergency loans prior to COVID-19 anywhere in the world.
The economic cost of this pandemic for the U.S. alone has cost the taxpayers $22.8 trillion.
Rest of the world
Meanwhile, in Europe, taxpayers were told by their politicians that they would no longer be paying to bail out banks. However, in contrast to what was said, before the pandemic in Dec 2019, Germany bailed out Nord Lb bank for the tune of $4 billion.
Countries around the world are abandoning fiscal policies of running a balanced budget and borrowing vast sums of money to protect businesses and industries.
As the health care systems around the world are being pushed to the limit and people are losing their lives the need for critical resources keeps increasing. This places extreme strain on governments as they face growing demands for cash. As a result, many governments are borrowing unprecedented amounts of money to fight the pandemic.
Here in Australia
According to ASIC in 2018, small businesses make a significant contribution to the Australian economy, making up 20% of GDP and employing about half the workforce. Of the 2.4 million Australian companies registered with ASIC, about 96% are small businesses with fewer than 20 employees.
Small businesses in Australia and around the world are under an unprecedented attack due to the COVID 19. The overheads and fixed costs these businesses need to maintain does not stop and are not able to generate any income.
Therefore, every single day, they operate at a loss. The Australian government has stepped in by allowing businesses to access money as part of the stimulus package. The real question that needs to be answered is “is that enough?”
The common problem
The most common problem facing individuals and business at the moment is access to funding. Reports of a lot of server crashes have been an ongoing issue due to a multitude of businesses and individuals accessing the same government websites at the same time.
This pandemic also has a lot of unforeseen effects on Australian companies that depend on seasonal workers such as the food industry in Australia. This sees a lot of Australians residents and temporary working holiday visa holders crossing state borders for harvest. That is very restricted now in the current climate. Also, the current international climate reduces demand and increases competition.
Many firms and small businesses in Australia and around the world need to be able to reopen in a timely manner before it kills their business.
What the banks aren’t telling us
Even though Australia has very robust banking regulations, the banking sectors around the globe, unfortunately, are not prepared for the fall out from the pandemic. Credit has to be given beyond levels compared to 2008, as banking sectors around the globe are in much better shape than before.
The exposure banks have in regards to loans on their balance sheets needs to be played out. Loans from corporates to corporates and if even one of them default on their short term loans the stress on the banking sector would be immense.
Also, the global fall in GDP and the standstill of economic activity has now gone on for a very long period. So how are the banking sector’s non-performing loans faring? They are accumulating and the banks capital and liquidity reserve are not sufficient to deal with this crisis.
My critics would say that banks around the world have learned from the last financial crisis. However, I would like to point out that when planning for a crisis, we planned for a similar 2008 crisis that originated from the financial sector. No bank’s risk models would have been able to determine or predict the current impact the COVID 19 pandemic has on the global economy would have on their capital reserves. This could lead banks facing solvency issues and major companies asking for a bailout.
One needs to look no further than our flight industry with perennial blue chips Qantas being bailed out and Virgin threatening to enter voluntary administration at the time of writing.
Let’s not forget with the bailouts in 2008, very little of the money provided to the banks and other large firms actually went into the everyday economy. They went into dividends, bonuses and share buybacks. This was a very serious breach of taxpayers trust.
However, with the current bailouts and stimulus being churned out globally, I hope the money goes into the real economy to jump-start the fallen GDP.
Governments worldwide need to focus more on bailing out households. This is because households will have a source of income, which leads to them being able to meet their financial commitments.
Financial commitments in the form of day to day bills, mortgage/rent, credit card or personal loans. By bailing out the household, you’re bailing out the financial system and reverse engineering liquidity being pumped into the market.
Road to recovery
We look at the way out in Part 2 – GVC, Global Virus Crisis – Road to Recovery?