The economic cost of COVID-19 has been, and continues to be, immense. But, in the UK, where will that cost land?
A healthy banking system will be critical to the pace of economic recovery in the UK. But with businesses and individuals struggling to avoid the financial distress brought on by the pandemic, the banks are already reporting significant loan losses. Further economic scarring through any second wave will only cause these loan losses to mount.
These pressures could cause the banks to consider how they mitigate loan losses and the wider effects of the pandemic on their profits and capital standing: how do they price in additional risk; is there any room to offset the squeeze on the Net Interest Margins; and how do they restore capital levels to those expected by regulators? There is also a vital role for UK regulators and the Treasury to play in enabling the banks to manage the burden of Covid-19, namely in reviewing the regulatory agenda to ensure that the desire to encourage competition in the banking space and to drive other regulatory initiatives is balanced out with the impact of regulation on sector profitability.