Central banks keep the printing press on Maximum volume in 2020

A light-hearted observation in these troubled times……..

In children’s stories we often are told about the magic fairy who comes to the rescue, fixing problems with the swish of a wand.

Well, it would seem that governments and their central banks have made the most of ‘self-isolating in their castles’ (no doubt studying Harry Potter, Merlin the Magician and Cinderella’s fairy god-mother), dusting off their magical printing presses across Europe and, indeed, globally. Huge sums of cash have been promised, but ‘Wizard’ Trump and his elves have shown the greatest largess by passing a bill to inject $2 trillion into the US economy. Yes, 2 with 12 zeros after it!!!

The way our new mystical world works is that banks vet and approve who should and should not get a loan because after all, in theory, they are good at this. Umm, how many of you reading this have experienced the joys of dealing with a bank when you need a business loan? So, it ought to come as no surprise that, despite risk free magical money being showered on the banks by governments, some banks are still taking time to process applications – assuming you can get through on the phone.

Added to this, a number of our good old friendly banks were acting more like a bad fairy and asking for directors to ‘cough-up’ personal guarantees, a practice in the UK that the Chancellor of the Exchequer has now banned. Unfortunately, after nearly a fortnight in the UK since the government ‘dusted off its wand’, changes have had to be enforced on the banks. As the BBC reported, “Chancellor Rishi Sunak overhauled the scheme amid claims banks were taking advantage of the crisis. The government has pledged to guarantee £330bn of loans but only £145m has been lent so far”.

But please shed not a tear for those ‘wicked’ banks (the gatekeepers of magic money) as in the USA, banks are being paid 5% of the value of any loans they process to businesses under $350,000 and 1% for any loans over $2million. It is estimated that the cost to the US Fed to compensate employees for six months without work could be $500 billion! Therefore, the income that banks will generate will be $5 to $25 billion – good work if you can get it.

However, there are storm clouds on the horizon. Press announcements from the likes of Fitch credit rating agency will not have gone un-noticed – “Fitch Takes Action on 7 Swiss Banking Groups on Coronavirus Disruption….. Fitch views the risks to banks’ credit profile profiles to be clearly skewed to the downside and this is reflected in today’s rating actions. Fitch expects global economic growth to slow sharply in 2020, with increasing downside risks to this scenario.”

One wonders, is it a good idea for the UK FCA to cancel the 2020 stress testing for 8 of the UK’s biggest banks? Surely, given the lessons from 2008, we now need to know more than ever how robust the banks are, or is this just another sign of our ‘mystical magical’ financial world in action? Unfortunately, as Reuters reported, with global debt now being $255 trillion, this equates to $32,000+ for each of the 7.7 billion people in the world.

It would only take a small % default on this debt mountain to potentially wipe out global banking reserves and capital. In this nightmare scenario, who will then lend the cash that so many businesses will so desperately need as we try and avoid an even greater economic downturn, or will we see more ‘magic’ and, once again, our bankers will be bailed out?

The traditional banking community is seeing another challenge in the form of FinTech firms as these companies continue to gain greater adoption, perversely boosted by the coronavirus pandemic which has caused the central bankers’ printing press to be working overtime. The De Vere Group, a Swiss-based financial services company, has reported that there has been a 72% rise in the use of FinTech apps in Europe, thus perpetuating the trend of a rise in digital transactions and engagement with financial services.

While banks have tried to embrace new Fin Tech solutions the growth has been truly impressive and must surely continue to put pressure on traditional banking legacy systems that already struggle to communicate internally, let alone be able to fully embrace yet more new fully, digital banking systems.

The rise of new FinTech banking is not just restricted to Europe, as in the Philippines Rizal Bank saw more than double the usual registrations for its online banking service in the first couple of weeks of restrictions on travel being imposed due to coronavirus. One wonders how many bank executives, when they return to their offices, will reconsider their organisation’s plans and be more receptive to embracing Blockchain- powered solutions and Digital Assets?

The recent economic situation will no doubt have caused a shift in consumer behaviour, and banks will need to find ways to remain relevant in the eyes of their consumers or they, too, could become confined to the history books and fables of yesteryear.

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