Will the capital and liquidity buffers they have built be sufficient to see them through the most dramatic economic crash in history?

When regulators were drawing up plans to prevent a repeat of the global financial crisis of 2008, they rightly hit upon the idea that banks should hold substantial buffers in terms of capital and liquidity that would see them survive through another dramatic downturn. As banks built up these buffers, regulators insisted that each bank would be subject to an annual stress test to see if they would be able to survive a worst-case economic scenario. That worst-case scenario was one most bankers thought was not just unduly harsh, but unimaginable – a decline in global GDP of 5% to 7%. Today, as the coronavirus – and governments’ responses to its chilling consequences – infects the global economy to the point of virtual shutdown, daily predictions of GDP decline in the second quarter are getting worse by the day. Predictions that the world’s output could decline by at least 25% might be optimistic. Buffers were designed to help banks withstand an unprecedented downturn. As it turns out, the scale of what was coming was far beyond the imagination of even the most hawkish regulator. Yet, as Euromoney talked to many senior bankers over the course of recent weeks, they seemed relatively comfortable with their ability to cope with even a long-term slowdown. And they were becoming increasingly aware that the role of banks, alongside a level of state intervention the world hasn’t seen even in wartime, would be a crucial part of the reaction to, and eventual recovery from, the sharpest economic downturn in history....

Full article: https://www.euromoney.com/article/b1kxrvx42r38r6/can-banks-withstand-the-impact-of-covid-19?copyrightInfo=true