The pound faced a difficult day yesterday after the Bank of England announced it would be boosting its bond-buying programme by £100billion. The measure was put in place to help Britain’s economy get through one of its worst economic downturns in 300 years. The beginning of the week began with a slight boost for sterling after some positive Brexit talks led Prime Minister Boris Johnson to reveal he was hopeful a deal would be put in place by the end of July.
Research from EconPol Europe by Jézabel Couppey-Soubeyran, Erica Perego and Fabien Tripier looked at the problems the coronavirus crisis poses on banks.
The authors said: “The Covid-19 crisis is a serious test of the reforms undertaken in the wake of the 2007-2008 financial crisis.
“That led to reforms that were intended to prevent a systemic financial crisis or, failing that, to mitigate its consequences.
“The reality of systemic risk was one of the major lessons of the financial crisis.
“But we are now faced with the reality of a health risk that has been previously underestimated.
“On the scale of disasters, this health crisis is even more serious than a systemic financial crisis because of the way in which it simultaneously affects all economic activities at the global level.”
They also added that if banks keep offering support and bailing people out then all their cash reserves will run out.
They added: “If losses accumulate in the economy and financial markets, the erosion of banks’ capital will increase their insolvency risk.
“It will then be necessary to activate the resolution mechanism (SRM).
“After mobilisation of the creditors of the banking groups concerned for at least eight percent of the losses, the SRF could then be mobilised for approximately €40billion (its current allocation equal to 80 percent of €55billion).
“This, however, represents barely two percent of the capital of euro area banks.
“This amount would not be sufficient if several banking groups had to be recapitalised at the same time.”
Published at Fri, 19 Jun 2020 06:38:00 +0000