How to accelerate the resolution of ‘the financial crisis’?
As the coronavirus is infecting more people around the world, governments in some of the most affected countries have imposed lockdown on their people. Other countries also had policies to discourage people from traveling. There is no doubt that these policies directly hit the transport industry, airline companies suffered heavy losses due to the outbreak of coronavirus. I think that if governments do this, it will temporarily affect the development of the economy, but if there is nothing to do, just let the virus spread, it will hit the economy harder in the future. So, it's wise for now and I think more limitation is needed in the future. As the virus spreads and the government tightens traffic regulations, airlines will face huge losses this year.
Take British Airways as an example, the chief executive of British Airways has warned staff that the carrier will have to cut jobs because of the coronavirus pandemic despite a robust balance sheet and the support of a strong parent company in IAG. And BA applied for a loan from a number of banks were unfortunately rejected.
As the airline industry has been hit, so has the banking industry. This week growing fears about the coronavirus pandemic and an oil price war prompted a widespread market sell-off. And some industries like the airline industry hit by the coronavirus need to apply for a loan from banks. People get their money back and businesses need to borrow from banks. Regulators have forced them to build significant loss-absorbing capital buffers, reduce their balance sheet leverage and exit risky activities such as proprietary trading. Banks have been in a tough spot recently. Since their recent peak almost a month ago, European banks indices have plunged 40 per cent in an indiscriminate sell off of financial stocks.
Liquidity production is a central function of banks. Commercial Banks can only generate high yields if they take in enough deposits and to lend them out. High leverage is optimal for banks in a model that has just enough frictions for banks to have a meaningful role in liquid-claim production. However, now banks are not in a position to generate high leverage. Bank's capital structure choice is among different mixes of liquid claims immediately redeemable safe debt and equity financing.
From my opinion, if banks want to reverse the situation now, they can’t rely on their own, because it is different from the financial crisis in 2008. This time was not caused by financial factors. The epidemic is a factor that humans can’t predict and avoid since ancient times. All people and governments around the world face this outbreak actively, and reducing contact between people is the real solution to this ‘financial crisis’.
References
DeAngelo, H., & Stulz, R. M. (2015). Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), 219-236.
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