Banks seek reinvention as good guys

Tom Traill and Peter Warburton - 6 May 2020

No-one wants to play the bad guy anymore. Despite rapid escalation in unemployment, there are loads of vacancies for mean judges, tough cops, heartless landlords, dispassionate bailiffs and debt collectors and so on. Everyone wants to play doctors and nurses. Central bankers, no longer trained by pulling the legs off ants, sit down with community leaders to feel their pain. And commercial bankers, so desperate to be readmitted to respectable society after the PR fiasco of the past 12 years, have adopted a different approach to lending in the current crisis - along the lines of “The Milky Bars are on us!”.  Bank lending growth is soaring not slumping.

In 2008 the banks were at the epicentre of the crisis. They had taken on too much risk at the wrong price and, as the money markets froze, they feared first for their liquidity and then for their solvency. They were reluctant to extend new loans and, as observed in figure 1 below, global bank lending growth fell sharply, turning negative for the advanced economies. These are early days, but there are strong indications that we are not following the GFC playbook. The caveat is that, looking carefully, as the crisis unfolded in 2008, there was also an interval when the pace of bank lending increased, as banks found themselves stuck with loans which they had originated with the express intention to securitise.  There is a risk that this phase of bank beneficence will relapse.
 
Figure 3 shows that most countries have seen a pickup in bank lending over the past 3 months. Around half of the countries in our universe (including the US) have released data to end-March and most others are current to end-February. China and India are the two major exceptions, with only end-December data available.  We have assumed, for countries with lagging data, a continuation of the last recorded annual pace. The coronavirus has ripped through the global economy with devastating effects and national statistics agencies are struggling to catch up. While the full extent of the carnage in real economy data has yet to be revealed, a very different story is emerging in the credit data. The US data – the H8 report from the Federal Reserve – shows a quite extraordinary leap in bank credit from February to March – twice as large as anything in the past two decades (figure 2). 

There are critical differences between the GFC and the unfolding Covid-19-induced heart attack. When Lehman Brothers and AIG collapsed in 2008, this triggered depressionary dynamics. No lender in its right mind would extend credit to a new applicant and most unused credit lines to existing customers were withdrawn. The default risks were too great. With good reason, this was described as a ‘credit crunch’. In 2020, forbearance and relaxation of payment terms are all the rage. The message is: “don’t worry, just pay the money back in 6 months when everything is back to normal!” What if, in 6 months’ time, we have lost all hope of recovering the high ground of February 2020? Will lenders put on their hard hats and demand prompt payment, or will they simply reschedule those payments even further into the future?    

Commercial banks have sustained such significant reputational damage from actions taken during and after the GFC, in defence of their business models, that many dare not risk another bad crisis. For them, forbearance is a strategy for rebuilding community trust, irrespective of the balance sheet risks that it entails. This time, banks are not at the epicentre of the crisis and sense a unique opportunity to redeem themselves as being part of the solution, rather than the problem. Post-Basel 3, there is a residual issue over regulatory capital adequacy that will kick in at some point to constrain banks’ ability to lend. But regulations were made to be broken.   

Figure 1: 

Data source: Thomson Reuters Datastream and national sources

Figure 2: 


Data source: US Federal Reserve:

Figure 3: 

Data source: Thomson Reuters Datastream and national sources



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