Trust in banks is a core determinant of financial system effectiveness. While it is well-established that trust in banks fell sharply following the Global Crisis and affected individual decision-making and risk preferences, the longer-term impact of banking crises on trust in banks has not yet been explored. This column looks at the effect of experiencing a banking crisis on people’s long-term confidence in banks. It shows that living through a banking crisis diminishes trust in banks, especially for more mature individuals, and that the loss of trust is long-lasting.
Financial regulation and banking
Enrico Perotti tells Tim Phillips that while regulatory reform means that banks are unlikely to be at risk, the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures.
Years of quantitative easing by the ECB have suppressed sovereign yields to historic lows. This has contributed to a shadow banking boom, as market participants invested heavily in various private asset constructions. This column argues that the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures.
The COVID-19 pandemic has massive detrimental economic effects and demands immediate policy actions to prevent a financial or debt crisis. This column argues that while the fiscal policy responses in Europe have some merit in the short term, they put financial stability in the longer run at risk. It calls for a coordinated long-term fiscal plan at the pan-European level to complement national measures.
Banks are the key to providing financial oxygen to the economy, but the coronavirus pandemic is raising the risk that banks in the euro area will cease to function. This column argues that the return to normality we all crave requires, among other things, that banks be saved, and that this will not happen unless regulation is adapted and more public support is provided.
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Baldwin, Weder di Mauro, 18 March 2020
Events
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1 - 2 April 2020 / University of Orléans (France) / LEO CNRS - University of Orléans (France)
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8 - 8 April 2020 / /
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20 - 23 April 2020 / Guildford, Surrey, UK / University of Surrey
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23 - 23 April 2020 / Madrid, Spain / IE Business School
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23 - 24 April 2020 / Bratislava, Slovakia / National Bank of Slovakia in cooperation with CompNet
