6 Finance in the times of
coronavirus
Thorsten Beck
Cass Business School and CEPR
Economists have a bad track record in predictions, so I will not try my hand at predicting
the effect of the novel coronavirus (COVID-19) on the global financial system or the
global economy. Rather, I would like to offer some ideas on how to interpret what
might happen during the next months. Obviously, the effect of the virus on the financial
system will depend on (1) how much further the virus will spread across the globe and
its effect on economic activity, (2) fiscal and monetary policy reactions to the shock,
and (3) regulatory reactions to possible bank fragility. Current economic scenarios
range from a small growth dip over a recession in several affected countries to a global
recession as in 2008/9. While there is less monetary policy space today than during
the Great Recession, bank regulatory and resolution frameworks certainly offer more
policy options than 12 years ago, though the question is whether they are really fit to
deal with a systemic crisis. I am writing all this, recognising that there are much more
urgent and immediate public policy questions related to containing the spread of the
virus and the associated socioeconomic damage.
One big factor will be whether virus-related disruptions will be temporary or persistent.
As important as this is for the economic damage done by the virus shock (a V-shaped
dip and recovery or a deeper U-shaped recession), this will have repercussions for
the financial system. In the case of a temporary disruption to supply chains or a mild
demand-side shock resulting in a delay in consumption, banks can serve as support for
struggling firms, especially in the case of many European banking systems with close
and long-running relationships between firms and banks. Recent research has shown
that relationship lenders can help firms during times of recession and economic crisis
(Bolton et al. 2016, Beck et al. 2018), based on their extensive knowledge of firms and
long-run relationships. A longer slowdown or even a recession, on the other hand, will
put pressure on banks’ loan portfolios and solvency positions. Rather than the recent
correction of stock markets across the globe, it will be non-performing loans (as well