Source: Bank for International Settlements
Although until now the banking sector has done relatively well, governor Knot cautioned that, as the COVID-19 crisis persists and the economic impact deepens, the banking sector is likely to feel the consequences of increasing business insolvencies in the near future. In the short term, he urged fiscal and monetary authorities, supervisors, and banks to “continue to do what they have done so far: provide the necessary stimulus, use buffers and provide credit, while keeping prudent levels of capital to be ready for future headwinds.” For the medium term, Knot stressed the importance of looking more closely at regulation of non-bank financial institutions.
In his novel The Sun Also Rises, Ernest Hemingway describes a conversation between two men, one of whom recently went bankrupt.
“How did you go bankrupt?” Bill asked.
“Two ways, ” Mike said. “Gradually and then suddenly.”
End of quotation.
This neatly sums up the risk we face at this stage of the economic crisis. Until now, governments andncentral banks around the globe have been able to mitigate the economic fallout from the COVID-19 pandemic. But the health crisis persists. Many countries are now experiencing a second wave of infections. For the economy, this means recovery now seems further away than we had hoped for. And the economic impact is deepening. Many firms that so far have managed to keep their heads above water, may as yet go under. The banking sector is likely to feel the consequences of that in the near future.