A stress event like no other

COVID-19 poses a major challenge to European bank solvency, liquidity and economic viability which could be more severe and have more profound long-term consequences than the 2008 Global Financial Crisis (GFC). Although supporting customers and society through the pandemic is the first priority for banks, for this to be sustained, they must themselves remain solvent and viable.

European banks entered this crisis before having recovered fully from the last one, in terms of being able sustainably to cover their capital costs – our definition of viability. Although most banks have plans in place to address this, COVID-19 will increase both the urgency and the difficulty of this challenge: To rebuild their capital ratios after the pandemic, they will need to be seen as investable businesses with credible plans to restore their performance levels, against even stronger headwinds than before.

The purpose of this report is to examine how banks can respond, recover and thrive again, specifically through a capital lens: The response involves both a protection and a further commitment of capital; the recovery must involve the replenishment of capital, because there will be heavy losses; and the thrive phase will involve business transformation to deliver a viable future where capital returns cover capital costs.

To manage this effectively, banks will need to apply rigorous disciplines around what we term the capital lifecycle through a dedicated COVID-19/ Capital task force charged with coordinating parallel and iterative responses across strategy, execution, monitoring and reporting domains, through respond, recover and thrive phases.

Our industry and capital management expertise spans the whole capital lifecycle and the full scope of required bank and related policy actions in response to COVID-19.

To discuss any matters raised in our report including how we can help please get in touch with the key contacts provided.