The world’s banks have largely been spared during the Covid-19 pandemic — unlike during the global financial crisis — but there remain a group of weak banks that could still face challenges, cautions a report from the Bank for International Settlements (BIS).
In a staff bulletin that examines the resilience of banks based on their market valuation, capital strength and stress test performances, the BIS said that Covid-19 has been an “unusual crisis” for the banking system.
“Despite an unprecedented stop in global economic activity, bank losses have been modest even as lending has remained strong,” the organization noted.
Unlike with the global financial crisis, where spikes in unemployment and bankruptcies inflicted losses on banks that caused them to limit lending, “in this crisis banks not only avoided deleveraging but lending actually increased,” the report said.
Strong performance by the banks was largely due to the extraordinary levels of government support, both monetary and fiscal, that were unleashed in the face of the pandemic.
As a result, loan losses have remained low, “not least owing to comprehensive policy support, which has contained corporate insolvencies as well as risks to banks, through loan guarantees,” the BIS said.
The report also found that investors remained confident in the continued resilience of banks.
“An assessment of 360 of the largest 500 institutions from 50 jurisdictions shows that market valuations have broadly recovered from the troughs observed at the onset of the pandemic,” it said.
Yet, at the same time, the analysis also indicated that there remains “a weaker tail of banks” that are still struggling with weak profitability and potential credit losses, which could yet threaten some banks’ resilience.
“These banks, mainly from Asia and Europe, appear particularly exposed to potential setbacks in economic growth and an associated increase of credit losses once crisis-related policy support and prudential relief are phased out,” the BIS said.
These are weaknesses that largely existed before the pandemic, the report noted, as the banks in the “weak tail” now were generally already in that position when Covid-19 hit.
“This finding suggests that the focus should be on weaknesses in these banks’ business models that have been accentuated, but not caused, by the crisis,” the report said.