Financial regulators have made $500 billion in capital available for lenders around the world, which gives lenders the freedom for another $5 trillion of loans around the world to go toward cushioning the blow the coronavirus has dealt to the world’s economy.
The relaxing of the limits has let families, businesses and communities stay afloat fiscally as the virus forces normal courses of money, like most businesses and restaurants, to close down for fear of spreading infectious germs or catching them.
The blow so far has been devastating; some studies show that the economy is on the worst track since the Great Depression nearly 100 years ago. Thus far, millions have lost their jobs from layoffs or flat-out closings of businesses. In the U.S., unemployment has soared to record highs.
The relief has been worldwide thus far, with regulators and central banks freeing up $492 billion that has primarily come from cutting the extra capital limits put in place after the 2008 financial crisis in order to strengthen leaders’ balance sheets.
Regulators have proposed a number of fixes banks can use to embolden finances for now: to freeze dividends and rein in bonuses, to hold off on implementing harsher capitalization rules, to provide exemptions for now on calculating capital requirements.
Central bankers still think the system is in better health now than it was during the 2008 crisis. But conditions could continue to worsen if banks hold off on lending money in order to save capital. Capital, made up of shareholders’ equity and retained earnings, can be a primary measure of a bank’s health.
However, regulators seem to be hoping banks will take on a more positive role during this crisis than in the 2008 crisis, in which the banks were seen by many as the root of the problems. Now, banks are being seen as vital paths to infuse cash into the economy to keep things from collapsing while people can’t work and businesses face bills while no revenue is coming in.
Nicolas Véron, a senior fellow at the Bruegel think tank and the Peterson Institute for International Economics, said banks have effectively been transformed from capitalist machines into hands to assist the states, which is “temporary” but still significant.