COVID-19 Disruption Versus GFC – Are Banks in a Better Shape to Help Businesses This Time?

  • Apr 04, 2020 NZDT
  • Team Kalkine
COVID-19 Disruption Versus GFC – Are Banks in a Better Shape to Help Businesses This Time?

Recession is Here

On 28 March 2020, the Chairperson and Managing Director of International Monetary Fund, Kristalina Georgieva, had raised concerns over the current prevailing situation across the globe and stated that the world had now entered a recession like the 2009 crisis or possibly even worse.

However, the IMF also anticipated a revival in 2021 with a sizeable rebound, subject to successful containment of the spread of COVID-19 across the globe and preventing liquidity problems from becoming a solvency issue.

With stringent social distancing measures that are gradually translating to lockdowns in regions throughout the world due to coronavirus pandemic, the domestic, as well as global businesses, have been brought to a standstill with their declining economic activities increasing the burden on the already slowing growth in the economies.

Moreover, the intensifying adverse economic conditions across the globe are pushing the world towards the potential challenge of a series of bankruptcies and layoffs that are likely to not only undermine the recovery but also grind down the fabric of our societies.

Surge in US Unemployment Insurance Claims

The US Department of Labor stated that there has been a surge in the number of seasonally adjusted initial claims for unemployment insurance claims, reaching 6,648,000, thanks to an increase of 3,341,000 from the revised level in the previous week. The prevailing job cuts are seen as an effect of the slowdown in the economy as well as low liquidity in the businesses to pay employees.

Is Maintaining Liquidity a Burden Solely on Banks?

Maintaining individual liquidity is turning out to be a prominent challenge for businesses across the globe with many of them taking measures to cut cost such as temporary stand downs, salary cuts, unpaid leaves and even laying off employees. However, the governments have taken the front seat to address the issues related to the businesses. Fiscal as well as economic stimulus packages have been announced that are likely to assist the businesses and give a boost to the economic re-boot.

Governments’ role of ensuring support for businesses is complemented by the relief measures offered from banks to the business sector like deferment of the interest payments, no necessary payments of loan instalments for a certain period.

The central banks across the countries are establishing guidelines for the banks to support businesses. But the concern here arises for the gravity of liquidity and the financial strength of businesses. Are banks across the globe really that competent to support the businesses in times when it is highly difficult for businesses to secure their liquidity? Let us find out.

RBNZ Ensuring Strong Capital and Liquidity Buffers

The RBNZ believes that the financial system of New Zealand is sound and is supported by strong capital and liquidity buffers; however, the same is currently exposed to significant uncertainties from the impacts of COVID-19.

Term Lending Facility

With a view to extending support for the Business Finance Guarantee Scheme of the Government to assist in promoting lending to businesses, the RBNZ introduced a Term Lending Facility (TLF), a new longer-term funding scheme for the banking system on 2 April 2020.

The Term Auction Facility that was announced earlier by the RBNZ, as well as the Term Loan Facility, together aim at offering liquidity to the banking system and extend to guaranteeing access to funding for banks at shrunk interest rates for up to a duration of 3 years, which is longer than the Bank’s other liquidity facilities.

Cash Rate Reduction and LSAP Programme

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee had slashed the Official Cash Rate to 0.25 per cent and implemented a Large-Scale Asset Purchase programme to mitigate the severe economic effects of COVID-19.

Under the Large-Scale Asset Purchase programme, the RBNZ had decided to purchase up to $30 billion worth of New Zealand government bonds, in the secondary market over the next 12 months, across a range of maturities.

Deferment Plans on the Roll

In addition to the measures stated above, deferment of increased capital requirements and delay in planned regulatory initiatives were also introduced by RBNZ to allow banks to concentrate on lending to their customers during the disturbance caused by COVID-19.

Moreover, the RBNZ has also agreed with the banks for zero payment of dividends on ordinary shares as well as no redemption of non-CET1 capital instruments in order to extend support to stabilise the financial system during this period of economic uncertainty.

An Early Step

During March 2020, the RBNZ had announced the postponement in the date to begin increased capital requirements for banks by 12 months, which shall now begin by 1 July 2021, to enhance the availability of credit in the country’s financial system. Moreover, extension in the delay is likely in the future only if conditions demand so.

The deferment of the capital framework implementation offers significant capital headroom for the banks which the RBNZ currently anticipates, enabling banks to supply up to approximately $47 billion more lending.

During March 2020, the RBNZ’s view about New Zealand’s banks suggested strong liquidity and funding positions of the banks and the ability to manage short-term interruptions to offshore funding markets.

Continued Vigilance by RBNZ

With the belief that major financial institutions in New Zealand are well capitalised and liquid, the RBNZ is engaged in maintaining and ensuring normalcy in the functioning of the banking system.

The Reserve Bank of New Zealand has reassured its citizens that there is plenty of cash available, and there is a well-functioning system that supports the continual ATM cash deposit and withdrawal facilities currently.

On the retail and customer service front, the RBNZ acknowledged the collective adjustments that the banks, as well as customers, are making with an array of changes to ATM.

Assistant Governor of the Reserve Bank of New Zealand believes that the cash system is prepared to deal with challenges that might arise during the COVID-19 pandemic, and the RBNZ is in regular discussions with major banks and their key service suppliers, and they continue to report that all is well.

Bottomline

The fact that we have entered a global recession cannot be denied, and the same is expected to be quite deep. However, setting up containment measures aggressively, and proactively taking measures to support the economic system can help to shorten the duration of this period when the world economy is at a standstill.

   
x
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK