How Has the Pandemic Affected European Investment Banking?
As the coronavirus pandemic sweeps the world, the global economy is struggling. Around the world, companies are faced with some of the same concerns individuals are facing. Namely, do they have enough money to survive?
Even banking and commerce are affected. As other companies turn to them for help, the European Investment Banking industry is feeling its own effects from the pandemic. Are the banks strong enough to endure another financial crisis?
Despite the serious situation, there may be some reasons to be hopeful. Keep reading for an analysis of European investment banking and its current situation.
What Is an Investment Bank?
An investment bank helps other organizations (companies or governments, for example) raise capital. They take a role similar to an underwriter and make sure the stocks or bonds are priced appropriately. They may also help their clients with mergers and acquisitions.
Many European companies use bank loans for 60% of their credit. The rest of their financing comes through selling bonds or shares in their company. In contrast, most American companies use bank loans for less than 30% of their credit.
Effects of the Pandemic on European Investment Banking
The coronavirus pandemic has had a grave effect everywhere in the financial world. This is particularly true of European investment banking. The European economy is expected to drop over 10% in the first half of 2020 as a result of the pandemic. This leaves even the best investment banks vulnerable to bad loans, deteriorating assets, and lower share prices.
Many European banks are still feeling residual effects from the 2008 financial crisis. With bad debts from both real estate and government holdings, it took them over seven years to recover from that crisis. Now they’re starting to feel the hit as this current situation rages on.
Banks with big industry clients – aviation, oil, automobile manufacturing – find themselves struggling. As these industries draw down on their lines of credit to make up for lost sales, even the top investment banks find their reserves disappearing.
Cautious Optimism Investing in European Banks
Despite all this, there is reason to be hopeful. Europe reacted quickly to counteract the potential economic damage that could result from the shutdowns and quarantines.
The European Central Bank reacted quickly by pouring cash into its financial system. The ECB also provides centralized oversight of lenders. This has diminished the arguing and political jockeying between national banks.
The European Investment Bank Group, for instance, finds itself in a stronger position than during the previous crisis. Since the 2008 situation, many banks built up their own capital reserves and rely less on borrowed monies. So, at the moment, many are staying afloat.
Despite low-profit margins and residual effects from previous financial crises, European investment banking has mitigated the effects of the current pandemic. Of course, the longer this pandemic lasts, the more risk they face. But at the moment they are holding their own.
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