The Barcelona Institute of Economics (IEB) has published the third of its analyses on the impact of Covid-19. In the latest Info IEB ( https://ieb.ub.edu/en/publication/info-ieb-banca-y-covid-19-numero-35-abril-2020/ ) revolves around banking, authored by Antoni Garrido Torres, Professor of Economics at the University of Barcelona (UB).

The author observes at the onset that European banks currently maintain much higher liquidity and capital levels than they had before the financial crisis. Moreover, in anticipation of market tensions, the ECB has adopted a package of measures that will inject more liquidity and capital into the system, which is fundamental at the moment.

The big question is if these measures will ensure sufficient funding in the eurozone, which will depend heavily on the duration of the crisis. Given this, it should not be ruled out that more heterodox measures, such as deficit monetisation, should be taken.

With regard to Spanish banking, the analysis points out that the current starting position to deal with this crisis is much better than in the previous one, which was a significant part of the problem, as the document points out. On the other hand, the author states that “the public guarantee program launched by the government will not cause a significant and immediate increase in the delinquency of Spanish banks“. However, falling demand for credit (particularly those linked to the purchase of cars and housing) and lower commission income will “reduce the income of entities“. For the time being, a widespread reduction in personnel or staffing has been ruled out, according to the Professor the result will be “a further contraction of all profitability margins, which may cause some entities to end the financial year by recording losses“.

However, the study concludes that the impact will not be homogeneous. The most diversified entities (geographically and operationally) and/or less exposed to the sectors most affected by the global economic slowdown such as hotel or energy will better weather the emergent situation. The gradual closure of the emissions market, the drop in prices and in the much-needed concentration of available resources in crisis management suggest, according to the author, to leave until later potential mergers with other entities.

The document also notes that being forced to learn new channels to relate with banking institutions will enable them to accelerate plans to reduce their branch networks that have been put in place in recent years.