Executive director, EFPA Spain
Banks and investments, not yet safe from the Covid-19 crisis
It is time to make a first count of the economic harm of the pandemic crisis, although not all damage has occurred yet.
Firstly, we have all those companies that, disconnected from the artificial respirators, will definitely set sail and, with their closure, many jobs and much economic activity will be lost. Following those companies that will not be able to survive sixteen or more months of reduced activity, will arrive the growth of delinquency and all the precautions and doubts that an uncertain economic recovery generates in investment and, therefore, in bank credit.
Thus, it is a count of damages still provisional for both companies and banks, but necessary to deal with the planning of the immediate future with enough knowledge and information.
We should be particularly concerned about banks as the main providers in Europe of business finance, and as custodians of a large part of our savings. And about investment, understood as the final destination of all extra savings generated during the Covid-19‘s restrictions which are not going to fill deposits and current accounts that will only destroy our purchasing power.
The economic crisis induced by the Covid-19 pandemic will, sooner or later, reach a banking and financial sector that has accumulated more than a decade of very low or negative interest rates, a regulatory pressure perhaps useful for stability but costly and disruptive, and growing threats of competition, especially coming as a result of digitalisation. For banks, it has meant and is meaning a permanent and lasting threat to their business models and profitability. The Covid-19 crisis has provided even more pressure to existing sectorial trends through the perspective of more years of zero or negative rates, still more regulatory pressure and more digital competition. This time maybe not only coming for fintechs but also for bigtechs.
The acceleration of these trends in the banking sector will force, on the one hand, an increase in structural and personnel adjustments. The banking branch, which was already sentenced a few years ago, will now be definitively executed and nearly disappear. Accordingly, we will probably see large workforce adjustments and losses. The race for digitalization and the introduction of new technologies will also accelerate, forcing the traditional entities to invest more, trying to compete with new contenders; especially in the areas of payments, investment distribution and advice, small credits, etc. In short, an uncertain picture for traditional banking.
Similarly, the investment sector, which has also been subject to similar trends over the last ten years, is now combining the challenges still arising from the “great crisis” of 2008, magnified with the advent of the effects of the Covid-19 crisis. First, the financial repression of negative real interest rates that affects individual savers, which will now accompany them for at least another three or four years. Second, the effects of investment regulation that occurred with the last great crisis. Its effects are dual; on the one hand, it has improved investor protection and guarantees, but on the other, and because of new micro prudential and macro prudential regulation, the costs borne by the system have been increasing and putting downward pressure on investment returns. Finally, digitalization is also becoming ambivalent for investors. In part, it is understood that growing competition has obvious advantages for the investor; more alternatives and at better cost. However, it should also be noted that the personalization of the services’ supplied could be reduced. It is not clear that customer service, personal advice, and ultimately investment solutions are improving with digitalization and competition. Cost reduction trends are likely to generate more standardized and therefore less appropriate services and products for each investor profile. One element that allows us to confirm that the investment of individuals is at a complex crossroads is some of the major trending topics of current investment: trading and cryptocurrencies. We have here neither the will nor the space to deal minimally (we will do so in a future piece) with two topics that are poles of attraction for too numerous investors, especially in low and medium segments, usually fed up with the lack of real performance of their savings. They show the bewilderment and the frustration of negative interest rates, the confusion between investment and speculation, and the increasingly worrying lack of financial education, or rather, financial literacy.