Bank downgrades, new license suspension, and a light at the end of the tunnel

Thursday 9th April 2020 Justin Cleveland

All of Australia’s big four banks experienced a credit downgrade this week, part of the ongoing COVID-19 outbreak. Considering the extent of the fallout of the COVID-19 outbreak is yet to be known, it’s not a surprise.

Paul O'ConnorAs Janus Henderson’s Paul O’Connor, head of the UK-based Multi-Asset Team puts it, there’s no roadmap for what we’re experiencing. “COVID-19 has changed everything. It has shattered many previously held assumptions about the economic, market and political outlook and has swept in a fog of uncertainty that will take many months to clear.

“Given the wide dispersion of views among epidemiologists about how COVID-19 could evolve, it is hardly surprising that investors still have little conviction about how the virus will ultimately affect the world economy and financial markets.

“There is no obvious historical playbook that can help us navigate the road ahead.”

That said, O’Connor is bullish on what could happen. “While lockdown measures are expected to have a significant short-term impact on global economic activity, extraordinary monetary and fiscal response could lift the global economy back into expansion in the second half of the year.”

The response of central banks and governments has been largely swift and decisive, something O’Connor says is essential. “While COVID-19 containment measures are estimated to reduce income in the G20 by about US$1.4 trillion in the first half of 2020, these fiscal initiatives look set to deliver offsetting support worth around US$1.8 trillion.”

Recognising that the global economic situation remains fluid, which makes economic forecasting more speculative than ever, there are positive signs. Italy looks to be stabilising and, if the second wave of infections in China and South Korea are contained, there could be good news for the global economic recovery.

The good news for funds and financial institutions is that there won’t be any new competition for a while – at least six months. APRA is suspending most licenses in order to provide stability across the broader financial system.

APRA’s Melisande Waterford, GM of regulatory affairs and licensing writes, “Financial institutions, particularly those that take customer deposits, look after superannuation funds or issue insurance, occupy a unique position of trust. The financial safety of these institutions is key to the financial stability and well-being of the community and, as a result, these institutions are subject to higher standards than many sectors of the economy.”

Because the chances of a new organisation failing are so great during this time of extraordinary financial uncertainty, Waterford says, “Experience has shown that it is challenging for new entrants to succeed even under normal economic conditions, which is why APRA does not consider it prudent to license APRA-regulated entities at this time.”

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