Rewriting the rules: How Europe’s banks responded to Covid-19

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Forward-looking chief executives recognize that the coronavirus has changed the world and banking, perhaps for ever. As Santander’s group executive chairman, Ana Botín, says, Europe’s financial leaders have to “throw away the rulebook”.

“We’ve never seen this kind of crisis in our lifetimes,” she tells Euromoney. “We cannot play by the rules. We have to recognize that this is a different kind of crisis. And if we do not act now to protect viable businesses, then the recovery will take much longer.”

Or as Jean Pierre Mustier, chief executive of UniCredit and head of the European Banking Federation (EBF), puts it: “We’re in a new world. In the new world, you need to think and act differently.”

Banking executives, he says, “need to think in terms of discontinuity; your behaviour needs to handle discontinuity.”

To deal with the crisis, senior bankers have had to rethink normal ways of doing things. That’s affected where they work, how they conduct meetings and how much time they spend ensuring their staff’s safety.

It has also radically changed how closely they work with governments and how much they can prioritize their own short-term profitability, including how early they can expect loan repayments and what fees they can charge for things like overdrafts.

This recognition that all stakeholders will have to pay a price for this crisis – governments, citizens, shareholders and bankers – lay behind Botín’s decision to adjust dividends at Santander in March, earlier than other banks, and to halve her pay at the same time, seeding a €25 million fund for medical aid.

As the health emergency has translated into an economic emergency, the need for an intellectual revolution goes for government as much as for banks. The risk to nations’ productive capacity is so immediate that caution about debt could end up leading to higher debt-to-GDP ratios in the longer term.

Gone, at least for now, are the times when it the European Commission and national finance ministries could worry about their near-term fiscal deficits.

In this extraordinary period, Italy’s hesitation over its stimulus package may have only exacerbated the country’s risk of economic collapse and therefore default.

Italy initially guaranteed only 30% of new loans to small businesses, when even Spain went to 90%.

In contrast, Switzerland’s scheme has been much more been successful, mainly because it guaranteed up to 100% from the outset, allowing banks to entirely dispense with credit checks for smaller loans immediately.

Banks’ lack of experience in managing such a crisis and their highly visible public role are two reasons why Mustier – as head of the EBF – welcomed eurozone bank supervisor Andrea Enria’s request in late March that banks freeze their dividends.

In this emergency, Mustier says, banks need to do much more than just prioritize their part in the monetary transmission mechanism of the future. Instead, their role as payment providers and lenders to businesses – implementing government support measures – has never been so important.

Frédéric Oudéa, Societe Generale

More than anywhere else, Italian banks’ bad-debt hangover after the last crisis showed that ambitions to be a national or regional champion, supporting local clients and society through thick and thin, cannot mean putting aside prudence.

But, as one of Europe’s top financial institutions investment bankers says, decisions that make sense individually are suicide if everyone does it. 

Today, it’s the job of governments as well as the banks to make sure banks don’t cut off liquidity when it matters most, triggering mass insolvencies.

Strong leadership in both the public and private sectors is therefore crucial, including that of industry bodies that can marshal the banks, as well as communicate valid concerns to supervisors and governments.

“We are the channel between the central banks and businesses, and no one else can play that role,” says Frédéric Oudéa, chief executive of Societe Generale and chair of French banking association, the FBF.

“The way we act, in close coordination with all the public authorities – central banks, government – can help to limit the long-term impact, the destruction of businesses and productive capacity.”

At the organizational level, the need to get state-backed liquidity to hard-hit businesses quickly has meant putting aside traditional procedures and hierarchies. That includes elevating credit decisions for small businesses to centralized risk officers, particularly when the bank is taking just 10% of the risk and branch staff will generally know the company better.

“In times of hardship, you respond to the needs of the client,” says Jordi Gual, CaixaBank’s chairman. “They don’t forget that. It’s why they do business with you in the good times.”

Yet banks are managing ordinary people’s savings, so when lockdowns have made businesses and the economy as vulnerable as they are now, government support is essential.

Jordi Gual, CaixaBank

“When you expect loan losses to increase significantly, as a bank, you may decide not to do additional lending to preserve the soundness of your balance sheet,” warns Gual.

“Our experience tells us that in this type of situation the average expected loss could rise, for example, from 1% to 4% in the next 12 months. So if you want banks to lend at the same rates as before, you need to split the loan losses with the government at a ratio of one to four, hence the 80% guarantee.”

Even guarantees of 90%, as initially existed in Germany, can seem too risky when many companies have lost all or almost all of their revenues and when no one knows when lockdowns will end or when they might return.

Inevitably, some banks have been able to use those guarantees better than others, because of their risk appetite and their agility. It is for this reason that Germany lifted its guarantee on loans of up to €800,000 only a couple of weeks after capping the guarantee at 90%.

Going to 100%, like the more successful schemes in Switzerland and the US, is clearly something that the rest of Europe should have been able to do just as quickly.

As in Switzerland and later Germany, banks can then entirely dispense with the need to assess the risk, making the process much faster: getting cash to small businesses before they lose their ability to pay suppliers, rent, staff and themselves.

“My responsibility, and our responsibility collectively as a management team, is to make sure we have a prudent and strong balance sheet,” says Botín. “That’s why the government guarantees are so important.

“It’s not about supporting the banks. It’s about supporting companies that otherwise would not have access to sufficient credit. I do think that, in some cases, governments are right to provide 100% guarantees.”

Good banks understand that they have to play their part. They know that means providing liquidity quickly, starting with solid borrowers that they know well.

It then means distributing state-backed loans to hard-hit businesses in the spirit of programmes that have been designed partly with banks’ collective interests in mind. And it means making their digital and physical payments infrastructure available, as Italian and Spanish banks have done, for example, to distribute unemployment benefit or advances on it.

Even if such activities aren’t a big revenue earner today, it will benefit banks in the longer term, through economic strength and through the goodwill of their clients, public and regulators.

“Clearly banks will have lower revenues: that’s not the key issue, rather than increased loan loss provisions,” says Mustier. “The guarantees offered by governments will be an extremely important parameter in order to lower the amount of loan-loss provisions that the banks might have to take if the situation worsens meaningfully.”

In Germany there has been much less pressure on the big banks to make masses of quick risk decisions and not just because they have a relatively low share of small business loans compared with the local savings and cooperative banks.

The health and economic crises in Germany are less severe, not least because the government is rich enough to react with exceptional vigour. Even after announcing the biggest and boldest guaranteed loan programme in March, it later became the first in Europe after Switzerland to backstop 100%.

In southern Europe, by contrast, banks and businesses don’t have the luxury of a sovereign with the financial confidence of Germany.

In Italy, only after weeks of delay and damage to businesses and employment did finance minister Roberto Gualtieri announce a stronger package of new state-backed loans in early April. Even then it fell well short of the German and Swiss schemes, though the need in Italy is much greater.

“If businesses receive this funding, they will survive and prosper, the recovery will be quicker, and the need to use the guarantees will be lower,” says Gual. “If they don’t, there will be more loan losses for the government, higher unemployment and more of a fiscal burden.”

The European Union, particularly the eurozone, should be there to help. But ignorance, prejudice and politics have got in the way, even in the depths of a continental disaster.

Lacklustre support from some Eurogroup finance ministers has given weaker economies even less room for manoeuvre. The financial burden has instead fallen harder on populations and businesses; and in terms of the policy response, it has fallen back on the European Central Bank and national commercial banks.

Ana Botín, Santander

Thankfully, the big banks in southern Europe and France are generally much more profitable than their counterparts in Germany and their smaller peers at home. The German state, on the other hand, is better able to help than any other government, especially those southern Europe.

Given this, it’s perhaps natural that the big southern European and even French banks would be more proactive in terms of offering liquidity at their own risk first; implementing whatever support the government can give; and assisting the national medical response.

“We’re going to support the economy as much as we can, in a prudent and responsible way,” says Botín.

That’s why Santander unveiled a €20 billion programme of additional liquidity support for small and medium-sized enterprises, and self-employed workers in Spain, a week before the government announced its guarantees.

BBVA and CaixaBank announced similar schemes a couple of days later.

In total, according to Spanish banking association AEB, these liquidity measures by the local banks are worth about €100 billion. That’s the same size as Spain’s state-guaranteed loan programme, which is much smaller, even as a proportion of GDP, than the programmes that Europe’s other big countries have announced.

Similarly, in Italy, Intesa Sanpaolo announced a €15 billion programme of additional loans for SMEs, at a time when the government’s programme focused merely on supporting repayment holidays.

UniCredit also went beyond the first lacklustre government programme, saying it would provide SMEs with additional finance of at least 10% of their outstanding debt.

Because these programmes pre-empted state action, the most useful thing in all of them has been speed and operational preparedness.

“We had done a lot of the risk analysis already,” says Botín, “so when the government programme came, we were ahead and could actually disburse the funds to the companies much more quickly.”

Similarly, CaixaBank’s programme was up and running three weeks before the government’s scheme, according to Gual.

Even French banks seem less daunted at the task of disbursing these loans than their German counterparts, even though their job is larger.

Whereas elsewhere governments have instituted stronger legal backing for household and business debt moratoriums, the French banks voluntarily agreed to a six-month repayment holiday on the principal of outstanding loans for businesses and the self-employed.

SocGen rolled that out automatically to 35,000 borrowers.

Worryingly, although UK banks went into this crisis with fairly robust finances, it’s been harder to see them diving in to support small businesses with new loans, even when their relatively strong sovereign offered an 80% guarantee on £330 billion of loans or more.

That might be partly because the British state is less adept at providing public financial support to businesses through a national development bank, but it’s perhaps not a coincidence that Royal Bank Scotland – still majority state-owned – seems to have stepped up more readily than most.

Meanwhile, it’s also notable how much banks in southern Europe have done more to provide financial and logistical support to their local hospitals and health systems.

To a greater extent than elsewhere in Europe, the big banks in Spain and Italy are among their countries’ biggest corporate profit earners. They’ve been able to mobilize international networks of contacts and suppliers to help their state and regional governments source vital medical equipment when global supply was scarce and demand intense.

Compared with the slow-drip international charity programmes that global banks usually do, this aid has come exceptionally quickly.

For example, even before Intesa Sanpaolo had finalized an agreement with the central government department in charge of the medical response in late March, it gave €400,000 to meet the urgent need for funds to set up a field hospital in a fairground in nearby Bergamo, one of the towns hardest hit by the virus.

Similarly, Santander got a desperate call to fund a field hospital in Madrid. It immediately donated €4 million from its new medical response fund.

“We were asked to help, and said: ‘Of course, count on it,’” Botín recounts.

In Spain, BBVA matched Santander’s €25 million fund a couple of days after it was announced, as the two joined a group of big corporations to raise €150 million, pooling logistics and procurement capabilities. BBVA later said it would donate €35 million. Now Santander could get to €40 million.

In France, BNP Paribas announced a €50 million package of global donations just over a week after SocGen said its programme would reach a similar amount. Now SocGen is planning another €50 million for Africa.

Among Italian banks, the donation from Intesa Sanpaolo stands out. By mid April, it had allocated €80 million as part of the €100 million protocol it signed with Italy’s civil protection agency: more than €50 million for medical and personal protective equipment, and more than €25 million for hospitals in Italy’s four biggest cities.

Such a big gift was entirely appropriate, according to chief executive Carlo Messina, given the extraordinary nature of the emergency. It came after a pledge of a similar size by national insurance champion Generali.

Only one other European bank has made such a large donation. Barclays announced a £100 million package in early April, mainly targeting the UK, where the health crisis is as bad as anywhere in Europe.

German banks, like those in the Netherlands and Scandinavia, are notably absent from all of this.

One of them tells Euromoney there isn’t the demand, as the pressure on health services isn’t as great as elsewhere.

Deutsche Bank has done more than most in Germany, perhaps because of its international presence – although its most eye-catching initiative is a donation of 375,000 masks to the health authorities in Frankfurt. BNP Paribas, by comparison, has donated three million masks to hospitals across Europe.