Banking sector has been massively hit by the economic repercussions of the Covid-19, as have other sectors like public health. But as in the past crises like the global financial and the European debt crises, this time it did not start with the financial sector but in no time it became very clear that the financial sector was critically hit and was trying hard to mitigate the impact of crisis and in supporting the recovery process. It became a vicious cycle with financial institutions also being affected by the economic interruption which went in loop, for example, by not earning money, households was unable to repay mortgages and consumer credits; by not having clients or not being able to produce goods/services results, firms in turn suffered lost revenues, undermining their ability to repay loans. This did not stop here, SMEs with no access to public capital markets withdrew their own credit lines in order to have sufficient cash buffers at the time of disruptions, which implied that there was an increase in the funding demands on banks.
To add to this, governments have recycled the banking system to station support to the real economy, extending from credit guarantees to payment holidays. Governing authorities throughout the globe have been engaged in few important steps to stop a credit crunch causing from the pro cyclical tendencies in bank lending, including depressing countercyclical buffers where they were before above zero, letting banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G) and the capital conservation buffer (CCoB) and permitting banks to operate below 100 percent of the liquidity coverage ratio (LCR). While the regulatory authorities, particularly in Europe, intensely encouraged banks and other financial institutions to abstain from profit circulation.
Current focus is on crisis mitigation and it is clear that non-profits have been accumulating in the banks is most likely on balancing sheets. Deriving from the scenario, the banks will have the major role in the post pandemic re allocation of resources. To start with, few sectors will recover stronger from this crisis like the information technology [IT]) and others will emerge fragile and with less response for their goods or services. There will definitely be a wave of liquidations of unrealistic firms over the coming years, a course in which banks as prominent creditors for these firms will perhaps play important roles but also incur losses. And next, there is more over-all corporate over-in debtedness in the economy, not all overleveraged firms are unrealistic; restructuring (as under chapter 11 in the United States) might be well-organized than liquidation (as under chapter 7 in the US) again, banks will partake critical roles in this procedure. To end with, corporate over-indebtedness and insolvencies will be replicated in the non-performing assets on banks’ balance sheets. Permitting banks to timely suspend the acknowledgment of these losses can lead to zombie lending, as was seen in Japan with the crisis of the 1990s as it will again avoid the essential reallocation of resources. Forcing them to recognize these losses, yet, can result in undercapitalized, if not worsening, banks. To conclude, the banks will be required to deal with significant losses to be acknowledged in the next few years and they will have to play an important role in corporate reorganizations while being anticipated to support rising sectors of the economy with subsidy.
The banks around the world also playing the roles in the economic recovery, where as In Europe, the banking sector itself will be needing the utmost restructure possible.