Europe’s banks play a key role in cushioning the consequences of the corona pandemic. According to a study, the crisis threatens them with loan defaults of 415 billion euros. The institutes must strengthen their risk management.
Studies and research on trends and developments in the corporate banking sector, including corporate and investment banking.
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In order to reduce the effects of the corona pandemic on the financial system, many countries have switched their state subsidy measures to granting private loans. This largely shifts the responsibility of keeping the economy going to private lenders.
For a current study, the consulting firm Accenture has investigated the consequences and calculated that European banks will have to raise up to 415 billion euros to cover pandemic-related credit losses this year. To cope with this task, 2.4 percent of the existing loans have so far been set aside for cover. This is almost twice as much as the institutes wrote off during the global financial crisis in 2008.
Public and private debt soon at record levels?
In an increasingly leveraged economy, banks are faced with the task of managing their loan portfolios and making decisions about new lending at the same time. The authors of the study also found that this could result in a world record level of public and private debt.
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Analysts predicted that this could be up to $ 200 trillion by the end of 2020. If this value were reached, the repayment ability of companies and private households would be seriously jeopardized.
State aid programs alone are not enough
When government aid programs expire, institutions will have to keep more capital to protect against loan defaults. In order to align their strategies for credit and risk management accordingly, banks need a predictive and data-supported view of the current credit risk, whereby the long-term view of the customer must be in the foreground. Last year, European banks provided the comparatively small sum of 80 billion euros to cover potential credit losses.
According to the authors of the study, financial institutions will need an additional 265 to 335 billion euros in 2020 for the potential write-off of non-performing loans. For example, U.S. banks in the U.S. could write off up to $ 320 billion in 2020, an increase of $ 265 billion from 2019. Chinese banks could write up to $ 360 billion in write-downs over the same period, an increase of $ 190 billion from 2019.
Overall, banks are well positioned financially
Numerous banks were financially so well positioned at the beginning of the pandemic that significant credit losses could be absorbed. According to the authors of the study, the world’s largest banks hold capital reserves that are well above the requirements of the supervisory authorities.
It should also be noted that the five largest US banks were able to provide reserves amounting to 60 billion US dollars in the first half of the year. European banks would have deposited nearly $ 18 billion in the first quarter of 2020. These reserves could be called once government funding ran out and customers defaulted.
Balance and sensitivity are required
Difficult decisions are imminent for banks: between loan extensions that help financially viable customers or the delay in an inevitable insolvency. Banks who now act with foresight can use the data and analysis skills they have acquired so far to develop operational strategies for credit management that are tailored to individual industries and regions.
In a climate where bad debts have no impact on consumer creditworthiness and where a company’s real economic position is unclear due to reduced working hours and wage protection regulations, banks could take a data-driven approach to managing their loan portfolios.
How banks are strengthening their core credit management skills
In the past ten years, the banks’ credit management has shrunk to a minimum. In order to cope with the rising failure rates, many of them would now have to expand their resources to an extent that goes well beyond the traditional capacities in this area. However, thanks to the investments made in digital technologies, bank employees can now develop individual solutions for their customers in order to overcome financial bottlenecks.
4 Recommendations for Credit Management
The study contains four recommendations on how banks can strengthen their credit management skills and prepare their business for the challenges ahead:
- Working with regulators to avoid or minimize unintended consequences, such as the thinning of new loans.
- Introduce clear guidelines and transparency regarding loan repayment.
- Ensuring fair treatment of borrowers with clear rules for assessing the creditworthiness of customers.
- Balance sheet risk management while advising companies and private households on how to deal with financial crisis situations.
It is difficult for banks to withdraw from the current lending business – even if it may seem tempting. The demand for credit will inevitably increase and must be met. If banks were to pull out, it would inevitably open up room for new competitors in the lending business. The biggest competitors are not only FinTechs and BigTechs, but also increasingly large, financially strong companies that offer new financing options for their products and services.
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