How sick might banks get?

FROM EBENEZER SCROOGE to Gru in “Despicable Me”, the villain redeemed is a time-honoured trope in fiction. There has been much talk lately of bankers enjoying a similar rehabilitation. Reckless overextension by lenders was the root cause of the financial crisis of 2007-09. This time the blame lies with a microbe, not moneymen, and banks are seen as potentially part of the solution, not least as conduits for massive state support for stricken firms and households.

The corona-crisis does indeed give banks a chance to improve their image. But it also presents them with some painful dilemmas and, worse, may ravage their bottom lines. Michael Corbat, boss of Citigroup, has warned that banks like his have to tread a “fine line” between supporting clients and undermining financial stability. They must conserve capital while also keeping dividend-dependent investors sweet. However they handle such choices, the risk of hefty losses looms: bank shares have fallen by twice as much as the stockmarket this year on fears of rising defaults.

The industry went into the crunch in decent shape. Capital cushions, depleted going into the last crisis, have since been plumped up. Banks have also been made less vulnerable to funding runs. This time the system has creaked but not buckled. Early evidence suggests that post-2009 efforts to push...

via The Economist: Finance and economics Business Feeds

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