What coronavirus means for banking

3 June 2020: Coronavirus has forced banks to lend the government’s money into an economy beset with risks. But keeping the money flowing may be the only way to stop a larger catastrophe, writes Laura Miller.

Coronavirus is first and foremost a public health emergency, but the necessary measures adopted to combat its deadly spread are inflicting widespread damage on UK businesses and the wider economy. 

Banks have been called on to grease the wheels with government money as trade and travel screech to a grinding halt. 

Payments holiday

Millions of individual consumers are no longer paying off loans, credit cards or mortgages: a holiday rather than a permanent absence, at least for now. Companies that are watching revenues disappear overnight are often being left in even more dire need of liquidity. 

A decade of defence-building hard-learnt from the last crisis is showing its worth in robust bank capital reserves. Public sentiment is that it's the banks’ turn to bail out others. But banks are struggling to adapt to being forced to lend into an environment of kaleidoscopic risks. 

Risks, but at what cost

Criticism that banks and other institutions are not moving far or fast enough to ease the squeeze on corporate customers is widespread and vocal in the press and from Parliament. Lenders that relied on taxpayer subsidies in 2008 are sticking rigidly to the rules now regarding credit checks, beleaguered businesses say. 

Banks are beginning to reply via impairment provisions to their bottom lines as part of the accounting changes that were born of the last financial crisis twelve years ago. Early signs are they are planning for big losses for at least the rest of the year, even with the UK Government throwing a kitchen sink worth hundreds of billions of pounds at the problem. 

The credit must keep flowing to reduce the chance of coronavirus turning from a health crisis, into a financial crisis.

You can read more about the challenges facing the financial system in the full feature from the Financial Services Faculty here