Global Shocks – Can Financial
Systems save the real economy?


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Global Shocks – Can Financial Systems Save the Real Economy?


The outbreak of COVID-19 reminded the world about the fragility of our economies and political systems. An external shock, leading to an economic decline, with interest rates already at an all-time low. The path to a sustainable economic policy was postponed once more. Contrary to the last global recession, banks are not the epicenter. In fact, the financial service industry could become a facilitator for a global economic recovery through its unique position. Consequently, we ask: can financial firms provide innovative services to overcome the growing inequality and give a new impulse to the global economy?

Furthermore, recent months have exposed several acute problems – a sharp divergence between Wall Street and Main Street. Equity markets have quickly recovered from their initial decline; however, especially the low-income sector faces layoffs and reduced incomes for several months to come. The US average hourly earnings increased, as job losses occurred mainly in the lower-income sector, illustrating the unequal nature of this recession. Keeping rates at such low levels any longer will further increase inequality in our society. Savings accounts, which are often the only accessible investment opportunity for lower-income households, are unlikely to yield significant returns soon. Moreover, particularly in emerging markets, a substantial part of the population has no access to banking services, rendering them even more vulnerable to this crisis. Providing these services provides a remarkable opportunity to close the wealth gap, but also invites a profound risk of execution failures.

Additionally, this low-interest-rate environment will severely diminish the margins for banks – they will have to reassess their business models. Innovative methods for estimating credit risks will become more significant, as any room for errors vanishes. According to recent reports, the current COVID-19 circumstances will boost thematic megatrends, which heavily focus on the increased use of technologies. Utilizing more holistic data sources might allow banks to assess the default probability with a higher degree of accuracy, especially given the increased use of leverage by companies during previous years.

Having been under strain due to the interest rate politics by central banks, commercial banks might be one of the losers going forward. The need to innovate and provide services beyond the classical loan business will become even more crucial in the future. Central banks have announced plans to extend their asset purchases to corporate debt, or even equities in the case of Japan. At this stage, it seems unlikely that they will reduce their engagement anytime soon. The repercussions will take monetary policy further into unknown territory. The consequences are complex and can barely be forecasted. While the imminent threat of rising inflation does not seem to be a critical topic for the market, given the efficacy of the central banks’ past actions on price levels, two fundamental questions remain.

Will firms in the financial services industry be able to offer solutions for the upcoming challenges? Will they provide the impulses needed for economic recovery and a sustainable financial system for the years to come?

Discover the insights of the leading minds in the finance world at the WHU New Year's Conference 2021!