{Member Insights} How corporate and investment banks are helping support the economy through COVID-19

The FACC-NY network is composed of a diverse mosaic of talented, experienced, and open-hearted professionals united by a desire to share their knowledge, nurture meaningful connections, and succeed professionally. In this new Member Insights series, we invite a member of our community to contribute timely and relevant tips for adapting your activities to overcome immediate challenges and plan for the long-term.

Amanda Dubuis is a Vice President in Risk Management at Credit Agricole CIB. Keep reading to learn her thoughts on how corporate and investment banks are helping support the economy through COVID-19.

Corporate and investment banks (“CIBs”) are a key component of the global economy, serving a wide range of clients, from small- to mid-sized local businesses to large national or international groups.

Most of the products and services we all rely on as individuals in our day-to-day life, whether our favorite restaurant, hotel, car company, airline, supermarket goods or retail brands, are provided by companies that themselves rely on financial advice, facilities and services from a CIB.

This is why these financial institutions have a key role in helping businesses survive these critical times, and are considered “essential services” similarly to energy, water and transportation providers.

Supporting companies through turmoil

Although a few companies are benefiting from increased revenue during the pandemic (such as online services), most industries are currently struggling due to restrictions on operations and a drop in consumer demand (tourism, leisure, retail, manufacturing, real estate, …).

And just like individuals in troubled times, businesses need to keep ensuring their survival, covering their fixed costs (rent, salaries, …) despite the drop in revenues. To cover these costs, many companies need to:

• Apply for grants and financial support, typically provided by the government, whether local or federal
• Withdraw money previously put aside, typically from the bank
• Negotiate or renegotiate loans with banks and/or payments schedules with suppliers and landlords

It is both in the economy and in the CIB’s interest that businesses make it through the crisis: in addition to impacting the overall economic landscape (unemployment, consumption, …), business survival means that CIBs can recover the money they have lent such businesses (whereas if the companies shut down, the CIBs themselves incur losses and are at risk).

In addition, there is a threat of domino effect where a business shutting down may lead to another shutting down, and so on until sooner or later, this impacts a company which presents a systemic risk: triggering severe instability or even the collapse of an entire industry or economy.

Navigating regulatory challenges during the crisis

CIBs are no superheroes who can freely operate even if it is to rescue businesses. They are highly regulated institutions that constantly need to comply with various requirements when providing services to businesses. These constraints are meant to mitigate a wide range of risks including:

• Credit risk: as an example, a CIB may be unable to provide loans to some businesses due to the financial situation of the latter making it very unlikely, even with time, that it will be able to pay its loan back. To mitigate this, a CIB notably needs to guarantee that some of the debt will be recoverable (through other assets, guarantors, …).
• Liquidity risk: as an example, a CIB may be unable to meet short term financial demands in the event of massive withdrawals by clients, as some money is tied up in illiquid assets (assets that cannot immediately be sold). To mitigate this, a CIB notably needs to carry sufficient liquid reserves.

In a depressed context such as the current pandemic, where most companies are performing worse than usual and where many need to withdraw money, both the liquidity risk (on the short term) and the credit risk (on the medium to long term) are accentuated. This means that CIBs would be unable to help companies unless the CIBs themselves are supported.

This is why governments across the world have been supporting financial institutions, notably by providing them with cheap or even free liquidity (discounted loan rates from national reserves such as the Federal Reserve for the US) and offering them governmental guarantees on loans that the CIBs will be offering to businesses throughout the crisis (especially as clients are not able to provide as strong guarantees as usual).

By supporting CIBs, governments are allowing CIBs to support their clients, the businesses that comprise our economy, employ our citizens, and provide us with the goods and services we all rely on.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Crédit Agricole Corporate and Investment Bank.

Interested in connecting with Amanda? Connect with her on her LinkedIn page.