Peru is heading towards a dangerous new populism

Unless the government can check the pandemic and revive the economy

In march when covid-19 first appeared in Peru, the government’s response seemed exemplary. President Martín Vizcarra imposed a swift lockdown.

Taking advantage of Peru’s strong fiscal position, his economic team launched the most ambitious aid package in Latin America, worth 12% of GDP.

Four months on, the outcome is disappointing.

With more than 350,000 cases and at least 13,000 deaths, Peru has suffered grievously from the pandemic. In April its economy contracted by 40% compared with a year earlier.

What went wrong?

Covid-19 exposed weaknesses that strong economic growth in this century had concealed. Even by Latin American standards, Peru’s health system is flimsy.

Total spending on health care per person is only two-thirds of the regional average; the system is fragmented between public and private and between national and regional authorities; and there were only 276 intensive-care beds for 33m people in March.

Some 70% of the workforce toil in the informal economy, many living in dense shanty towns and travelling on overcrowded buses.

For all these reasons, the government opted for one of the world’s strictest lockdowns. It extended to shutting down most big mines, although many are naturally isolated. All this amounted to an induced coma for the economy.

The government did its best to compensate. It has guaranteed Central Bank emergency credits worth 8% of gdp to businesses. The bank auctioned them, which drove down interest rates.

María Antonieta Alva, the economy minister, points out that as well as big companies, 156,000 small and micro businesses got credits worth $515m.

The government also gave an emergency payment of $220 to more than 6.5m households. Yet getting the money to people was hard: only 40% of Peruvians have bank accounts. Some of the payments were made via mobile phones but had to be collected from the state bank, which has fewer than 1,000 cash machines.

The lockdown did slow the spread of the disease, and the government has expanded health facilities. But the virus has not been defeated and as Peru opens up again cases are rising.

In Arequipa, the second city, patients are dying in tents in the street. Having been too strict, Peru’s health restrictions now look too lax.

Mr Vizcarra is better at the grand gesture than at follow-up, negotiation or delegation. Official information has often been confused. On July 15th he reshuffled his cabinet, sacking the health minister and bringing in Pedro Cateriano, an experienced politician, as prime minister.

“We will have better political leadership from this cabinet,” says Carolina Trivelli, a former minister. But she adds that the underlying problem is the frailty of the state and its lack of connections to or even knowledge of citizens.

At least economic recovery may be swifter than elsewhere, thanks partly to the injection of credit. Mines are now operating again, and electricity consumption is on the way back to normal. Ms Alva has allocated an extra 1% of gdp for public works. If all goes well the economy may end the year having contracted by less than 10% and could make up much of that in 2021.

But this depends in part on business confidence, which is being undermined by a legislature bent on populist measures ahead of a general election due in April. In September Mr Vizcarra dissolved the congress elected in 2016, which was dominated by supporters of Keiko Fujimori, the daughter of an autocratic former president. It was obstructive and had many corrupt members. Its replacement is as bad.

Many of the new lot on both the right and the left are inspired by a crude anti-capitalism.

Congress has suspended tolls in roadbuilding contracts; it has allowed pensioners to withdraw up to 25% of their private pension funds and threatens to refund some workers’ contributions to the state pay-as-you-go system, which would bankrupt it. It wants to impose price controls and freeze loan repayments although banks have already offered grace periods to many debtors.

The crisis has exposed shortcomings in Peru’s economic policies, as well as in its state. There are too many de facto monopolies. But they need intelligent regulation, not persecution.

“For the first time in 20 years populism is gaining strength to the point that it could govern the country after the election,” fears Carlos Basombrío, a political consultant. Preventing that will require more effective leadership from Mr Vizcarra.

How to feel better

Some economies are bouncing back. But recoveries can easily go wrong

Our analysis shows just how fragile consumer confidence can be

Orford ness, on Britain’s east coast, was a site for military tests in the 20th century. Large pagodas on the shoreline, still standing today, were designed to prevent blasts from doing damage to the surrounding wetlands. On July 4th the area braced itself for another sort of explosion.

“Super Saturday” marked the opening of pubs and restaurants for the first time since lockdown began.

But in Orford the beery bomb never detonated. The Jolly Sailor, a pub near the quay, had only a handful of customers in the garden. Across Britain it was the same story. Restaurant reservations remained 90% lower than they were the year before.

The fate of the Jolly Sailor hints at the difficulties that rich countries face as they lift lockdowns. Most forecasters reckon that advanced-economy output, after plunging in the first half of 2020, is likely to regain its pre-crisis level some time after 2021.

But not all recoveries will be equal. Some rich countries, such as Germany and South Korea, look best placed to bounce back—a “v-shaped recovery”, in the jargon.

The path of gdp elsewhere may look more like an l or a w. The Economist’s analysis of real-time mobility data also shows how easily economic recoveries can go wrong, as consumers react to the possibility of fresh outbreaks.

Some countries have a tougher job on their hands because their output has fallen more since February, when lockdowns started to be imposed. No one knows for sure yet who has fared well or badly. gdp data for the second quarter are not yet available, and in any case will probably be subject to large revisions over time, as is often the case in downturns.

But industrial structure is one indication. Surveys of economic activity in Germany suggest that it held up better between March and May than it did in France, Italy or Spain.

That may be because of its heavy reliance on manufacturing, where maintaining both output and a social distance is easier than, say, in retail or hospitality services. Capital Economics, a consultancy, argues that Poland will experience Europe’s smallest contraction in gdp this year in part because it relies little on foreign tourists.

The stringency of official lockdowns, and changes to people’s behaviour, has clearly played a huge role. Research by Goldman Sachs, a bank, finds that lockdown stringency—in terms of both the strength of official rules and how enthusiastically people practised social distancing—is strongly correlated with the hit to economic activity, as measured by surveys.

By this measure, Italy had the tightest lockdown for the most time (see chart 1).

A back-of-the-envelope calculation suggests that its gdp for the first half of 2020 is likely to come in about 10% lower than it would have been otherwise—a lot of ground to make up for a country that struggled to grow even before the pandemic. By contrast, South Korea’s gdp looks likely to fall by 5%.

The lifting of lockdowns is now boosting economic activity. By how much, however, varies from country to country. Real-time activity data suggest that America and Spain are laggards, not only in terms of visits to restaurants but also to workplaces and public-transport stations. Others are powering ahead.

By the end of June, economic life in Denmark and Norway had pretty much returned to normal. Danish retail sales actually rose by more than 6% year-on-year in May (compared with a double-digit decline in Britain).

Germany’s restaurants were closed in May. But in recent days they have returned to full capacity (see left-hand panel of chart 2).

A number of factors influence how fast an economy can bounce back. The state of households’ finances is one. Government support has shored these up: in places where stimulus payments have been large and focused on families, people have built up large cash reserves, which they can now spend.

Take the case of South Korea. Households quickly spent over 80% of a 10trn-won (0.5% of gdp, or $8.4bn) emergency handout. As a result, its economy might suffer less than other big advanced economies.

Aggregate household income in Japan is forecast to rise this year, thanks in part to generous emergency payments from the state. By contrast, fiscal stimulus in Italy, which had staggeringly high government debt going into the crisis, has been less generous.

All this is nothing without consumer confidence. Americans have oodles of stimulus cash in their pockets. Even so, they are cautious. A raft of evidence shows that if consumers are fearful, then lifting lockdowns makes little difference to economic outcomes.

An analysis of American counties by Austan Goolsbee and Chad Syverson of the University of Chicago, for instance, finds that a higher number of deaths from covid-19 is associated with lower consumer activity.

That seems to be the case at the country level too. Those with a smaller number of deaths from covid-19 per million people have bounced back more decisively, according to an analysis by The Economist using data from Google on visits to retail outlets, workplaces and public-transport stations.

Confidence today may also be shaped by the length of time spent under lockdown. Norway took just ten days to halve the intensity of its lockdown from its peak level. Many other European countries took ten weeks, however. That perhaps explains why Britons and Spaniards are still so cautious.

The latest mobility figures show precisely how fragile consumer confidence can be. People in American hotspot states, such as Arizona, Florida and Nevada, where the virus is surging, seem to have become more cautious (see right-hand panel of chart 2).

A high-frequency measure of American credit-card spending maintained by JPMorgan Chase, a bank, stopped growing around June 21st—and a closely watched measure of weekly retail sales has barely increased since May.

More ominously, high-frequency measures of the labour market suggest that employment in small businesses is once again declining. The risk of relapse is not confined to America.

A huge drop in Australian restaurant diners in early July coincided with a large coronavirus outbreak in Victoria.

Until the virus is stamped out, only one thing can be said about the recovery with certainty: it will be shape-shifting.

Epochalypse Now: How Deep Is Your Depression?

by: David Haggith

- We are nearing that mid-point in July when I said we would start to see the news turn from euphoria-inducing reopening positives to depression-developing realism.

- Now, it really is a retail and restaurant apocalypse.

- Epic Great-Depression-level unemployment begins new epoch in US history.

- This collapse may also now include a global dollar collapse, which will change the world and the United States' relationship to it.
We are nearing that mid-point in July when I said we would start to see the news turn from euphoria-inducing reopening positives to depression-developing realism.
Speaking of stock market bulls who are stampeding uphill on the euphoria side, I wrote:

"Right now the farce is with them - reopening has arrived! And these stupid people will believe that means they were right about the "V," virtually assuring they continue to bet the market up for a little while…. The reopening means economic statistics will improve rapidly. That will give a lot of stupid people many reasons to believe they were right to think the obliterated economy would experience a V-shaped recovery. 
What they won't see because they don't want to see it is that the steep recovery is not going to take the economy back to where it was… It may take stocks back to their last highs (and beyond!) but not the economy."

And, so it has tuned out. The Dow and S&P have stalled at about a 60% retracement of their earlier crash, which is right where I said I thought they would. They stopped rising well below their all-time peaks because the COVID crisis raised its ugly head (the one caveat I gave for stocks continuing rise to the moon) very quickly after our nationwide economic reopening…

…but massive bets have poured into tech stocks - long seen as the surest bet in a risky marketplace - and have pushed the tech-heavy Nasdaq on a reach well beyond its former peak:

So, we see the stock market proving both claims true - that a rise of COVID-19 would knock the wind out of the euphoric bulls but that, absent a host of new COVID-19 headlines, the bulls would continue to focus on the great reopening news because the worst news would come later.
That is how I read what is happening in this split: money effectively shifted from the more value-driven Dow and S&P where the rise had been going strong into the high-velocity, high-tech NASDAQ to complete the charge up past former highs as I said the bulls would try to do.
The path became narrower, but the tech charge, where most of the testosterone is, continued to drive up the center, pumped by the V-shaped fantasy - pumped so hard that those remaining bulls are paying no attention to the new COVID headlines, while others have fallen to the sides.
"Here's the full truth," I said in early June about the euphoria-inducing reopening:
"Reopening means, OF COURSE, businesses will start to show rapid improvement, and millions of jobs will certainly come back almost overnight. That's half the truth. The other half, which investors… won't see because they don't want to, is that many businesses will not reopen, and many jobs will not come back… But guess which half of the truth you get to see first? We'll be deep into July before we start to see where the rapid recovery stalls out, and then it may take a little longer before investors start to see it because they don't want to."
Yet, that truth is already flooding in for those who are willing to see it, and I'm going to lay out the broad overview of it here and then give a whole deluge of short facts tomorrow:
Now it really is a retail and restaurant apocalypse
While I said retail - because it was already dying - would show the worst damage, I also noted in other articles that restaurants would suffer similarly broad and quick deaths because they are typically run on thin margins.
So, here is where we are on reopening for those segments of the economy that I said would become the first devastating news to materialize, particularly restaurants, retail and unemployment. The latter I said would hold at deep recession levels. Now that reopening appears to have gone about as far as it is going to go because some states have reversed it, while others are going no further on an indefinite basis, we are already at the point where reopening is climaxing.
First, here's a real ground-level (Main Street) view of how jaw-dropping the destruction to restaurants turned out to be (worse at this early date than even I thought it would be):

"53% of restaurants closed amid coronavirus have shuttered permanently, Yelp data shows. 
In March, restaurants had the highest numbers of business closures listed on the app compared to other industries, and the rate of closure has remained high. Of the businesses that closed, 17% are restaurants, and 53% of those restaurant closures are indicated as permanent on Yelp… 
During the peak of the pandemic, the number of diners seated across Yelp Reservations and Waitlist dropped essentially to zero. In early June, numbers of diners seated are down 57% of pre-pandemic levels."
The National Association of Restaurants had estimated 15% of restaurants would close for good. I had noted another publication, Open Table, that estimated 25% would never reopen. I ventured 20% would not reopen but then many others that did reopen would close under the partial-opening restrictions in most states, so that we'd eventually be down about 40%.
It looks like many of the latter kind (the ones that would reopen and then give up) were smart enough no to even give partial-reopening a try because, as I said, most restaurants will run at a loss throughout the period of partial reopening. They cannot make it with their customer base cut in half… or worse.

53% of those listed on Yelp (which is most) that closed are gone for good. That is absolutely catastrophic. That's the number on Yelp that have so fully given up that they have already reported to their customers they will never reopen!
If you've been thinking I have been too bearish about all of this, wait until you see how bad it may become once many of those that have reopened give up the ghost in exhaustion:

"85% of independent restaurants may go out of business by the end of 2020, according to the Independent Restaurant Coalition… Independent restaurants, which comprise 70% of all restaurants, rely more heavily on dine-in revenue than chains and don't have a corporate safety net or support system to fall back on."
Business Insider
As for the retail apocalypse that I've been describing for, at least, three years:
41% of businesses closed on Yelp have shut down for good during the coronavirus pandemic. Retail was hit the worst…. Los Angeles recorded the largest total number of closures with 11,774 business establishments shuttering, but Las Vegas has had the highest number of closures relative to the number of businesses in the city at 1,921... Shopping and retail stores have suffered 27,663 closures.
We are not even to the middle of July, and already the first wave of permanent damage to wash over us is massive. Almost beyond belief! It's a total tsunami of "permanent" business destruction, and a lot more waves are coming from all the businesses that are impacted by the businesses that have just shut down for Good.
Yet, do you think I could convince bullish investors on other sites that we are going beyond a recession and into a second Great Depression and that the stock market is raving mad? Not even with my best arguments.
However, that, too, fits exactly what I predicted, which was that bull-headed stock traders would certainly be the last to figure this out. I was so certain the lunacy and complete denial would keep charging ahead that I said I was going to bet my own retirement money on it in stocks for a short ride up, unless and until the COVID crisis came crashing back into the party with new headlines of rising cases and deaths. It almost immediately did, making the ride shorter than I anticipated because that was my self-imposed stop for getting out of the risk.
I wanted to put my money where my mouth is to prove how much I believed what I was saying, and I would have made money had I stayed in because most of the stock funds I invested our three small 401Ks in were heavy in tech. However, I adhered to my stop when COVID crashed the party with rapidly rising cases.
So, it was a dumb bet in terms of hoping the health crisis would stay down for the first couple weeks of reopening, but it was not at all wrong about how far the market euphoria would keep pushing even past the start of truly depressing news that is now coming in before the mid-July date I gave for the reversal in the economic news flow. Today's rise in the Nasdaq in the face of today's terrible economic news, shown below, affirms that.
Epic Great-Depression-level unemployment begins new epoch in US history
I noted in my article referenced above that the biggest upward driver for the stock market's irrational exuberance would be the certain-to-be-seen rapid turnaround in job losses from the worst losses in history to the best gains in history. That certainly has turned out to be the centerpiece of the narrative the market is riding on, but the deeper truth, I said, would be…
"Unemployment will remain high enough to still be considered typical of a recession because marginal businesses did not reopen (including particularly retail stores that were barely holding on)…"
And, so, here is how all of that is coming together in this morning's hot news:
"As the number of new coronavirus cases in the United States rose to a single-day record [Wednesday], fresh government data on Thursday showed another 1.3 million Americans filed for jobless benefits, highlighting the pandemic's devastating impact on the economy. More than 60,000 new COVID-19 infections were reported on Wednesday and U.S. deaths rose by more than 900 for the second straight day, the highest since early June…. The grim U.S. numbers come on top of extraordinarily high jobless figures, although they came in lower than economists had forecast…. Initial unemployment claims hit a historic peak of nearly 6.9 million in late March. Although they have gradually fallen, claims remain roughly double their highest point during the 2007-09 Great Recession. With coronavirus cases rising in 41 of the 50 U.S. states over the past two weeks, according to a Reuters analysis, many states have had to halt and roll back plans to reopen businesses and lift restrictions."

Reuters lead competitor carried a similar kind of report a few days ago:

"US unemployment falls to 11%, but new shutdowns are underway.
U.S. unemployment fell to 11.1% in June as the economy added a solid 4.8 million jobs, the government reported Thursday. But the job-market recovery may already be faltering because of a new round of closings and layoffs triggered by a resurgence of the coronavirus…. While the jobless rate was down from 13.3% in May, it is still at a Depression-era level. And the data was gathered during the second week of June, just before a number of states began to reverse or suspend the reopenings."
That's how bad it is… just in the broad sweep! And that was measured before states started to reverse their reopening plans. That unemployment was, in other words, solely due to the effects of the initial shutdown continuing to play through.
An epic conclusión
These numbers are truly as grand on a historic scale as I said the next recession would be when I named what was coming "The Epocalypse" a few years ago. In fact, the data are worse by far than what I thought the starting data for permanent destruction would be back when I started (a couple of months ago) to lay out the timeline for how all of this would go down.
While the pandemic response is clearly a huge factor in the present crisis, the economy is collapsing much harder than it would have with deeper, more permanent destruction than our politicians ever thought their closures could cause because the economy was a house of cards ready to collapse in the first place.
They didn't see what destruction their actions would wreck upon the economy because they were blind to how fractured our economy was by the deep flaws I've been pointing out for years. Our social structures are caving in at the same time, as I also said would be part of The Epocalypse.
Shortly after the COVID crisis had taken down the stock market in a Great-Depression-era sized crash, I started making it clear that the worst numbers - the permanent damage - wouldn't even start to become known until mid-July. Now, I can say that the train of facts has started pulling into the station a week early.

This article presents the broad picture of just how much this recession is following the exact fast track I said it would… including the stupid stock market. Tomorrow, I'm going to lay out a finer-grained picture by presenting numerous headlines as thumbnail prints of the economic collapse that is gaping now open beneath us.
This is not just a recession. It may even become worse than the Great Depression. If these numbers hold for permanent business closures (and there is no reason to think they won't) and new unemployment claims continue as they are now starting to crystalize even before the middle of July, this will certainly develop into the complete economic and social collapse I call "The Epocalypse."
Death of the dollar, death of money as we know it
As I wrote in my latest Patron Post, this collapse may also now include a global dollar collapse, which will change the world and the United States' relationship to it. In addition to all I wrote in that article on the possibility of a dollar collapse and its effects, which was quite extensive, I am now including here in this article an interview with Shadowstats' John Williams on that same subject.
Williams has been an economist since the Nixon administration more than forty years ago. He is the one I sometimes go to for quotes on real economic data without all corrupt revisions the government has worked into its formulae since the dollar lost its last hold on gold in the Nixon era and the government had to start compensating for the truth.
Williams validates everything I wrote this week about a possible dollar collapse (and that means the Fed's destruction along with it), saying the dollar is looking seriously imperiled this year.
As I stated at the start of my Patron Post, I've never written about the collapse of the dollar as a possibility in any year until now. I'm not predicting it will collapse this year because I point out in my own article that there are also strong disinflationary forces at work, but this is the first year in which I think it actually could.
It is time to be vigilant about it, watching what is happening in foreign currency exchanges and keeping a close eye on what is happening with US inflation (not as falsely reported by the government, but as such stats used to be calculated in the 1970s and still are by John Williams on

I'm putting Williams' interview in this article, rather than my Patron Post on the subject, because he also spells out why this current economic crisis is going to turn into something even worse than the Great Depression - an all-out "economic collapse." Like me, he says the roots for all of this were laid in before COVID-19 came along.
Williams also says the recession started last year… when I said it would, though I also said it wouldn't be recognized until this year:

Global Investment Outlook

By: Geopolitical Futures 

Given the growing geopolitical tensions in a number of regions around the world and the challenging economic conditions, 2020 never promised to be a good year for global investment and trade.

The coronavirus pandemic, however, exacerbated the issue to say the least.

And with the release last month of the U.N. Conference on Trade and Development’s annual report on global investment, we have an indication of just how much the pandemic may affect the global investment environment.

The organization’s forecast takes into account the lockdowns and supply chain disruptions in East Asia, as well as the decline in revenue for major multinational companies.

According to the report, the COVID-19 crisis will cause foreign direct investment to decline by up to 40 percent in 2020 and another 5-10 percent in 2021. It points to coronavirus containment measures that led to the suspension of existing investment projects as well as efforts to shift production to meet domestic needs as the reasons for the decline.

FDI is projected to decrease in some regions more than others; it all depends not only on how quickly countries can return to “normal” after lockdown but also on their economies’ performance before the pandemic.

FDI in Europe is expected to decline significantly more than in North America and other developed economies, while FDI in Latin America and the Caribbean is expected to be cut in half because of their relatively more fragile pre-crisis economies.

UNCTAD says that the outlook remains highly uncertain, but it predicts that FDI will return to pre-pandemic levels in 2022. Investors are likely in no hurry to revive investments, as many are expecting a second wave of infections.

Global investment levels will depend on how long the pandemic lasts and the effectiveness of political measures to mitigate the economic consequences.

What Will COVID-19 Do to Banking?

Banks have a chance to improve their battered public image by playing a constructive role in mitigating the current economic crisis. But with COVID-19 set to accelerate the sector’s digitalization and restructuring, their future could soon become more uncertain.


vives11_DANIEL LEAL-OLIVASAFP via Getty Images_bankofenglandcoronavirusphone

BARCELONA – The COVID-19 crisis has revealed banks to be not part of the problem for a change, but part of the solution. They have so far proven to be resilient, mostly as a result of the stricter capital and liquidity requirements imposed on them following the 2007-09 global financial crisis. Today, many governments are using banks to channel funds to households and firms hit by the pandemic’s economic fallout.

Furthermore, governments have granted banks a temporary moratorium on implementing tougher regulatory and supervisory standards, in order to reduce the potential pro-cyclicality of measures introduced in the last two decades and avert a credit crunch. As a result, banks now have an opportunity to reverse the reputational damage they suffered in the financial crisis.

But they are not out of trouble, in part because the crisis will sharply increase the volume of non-performing loans. Moreover, as a recent report that I co-authored points out, the pandemic will accentuate pre-existing pressures – in particular, low interest rates and digital disruption – on bank profitability.

Digitalization will now advance rapidly, because both banks and customers have realized that they can work and operate remotely in a safe and efficient way. The resulting increase in information-technology investments will render many banks’ overextended branch networks obsolete sooner than they expected, particularly in Europe. That will necessitate a deep restructuring of the sector.

Medium-size banks will suffer because they will find it difficult to generate the cost efficiencies and IT investment needed in the new environment. Although consolidation could offer stressed banks a way out, political obstacles to cross-border mergers will likely arise in several jurisdictions as governments become more protective of national banking systems. In Europe, for example, where banking nationalism has been running high (with the exception of the United Kingdom), domestic consolidation seems more likely.

In addition, banks may face renewed competition from shadow banks and new digital entrants that were already challenging the traditional bank business model before the pandemic. In the United States, financial-technology firms, or fintechs, have made important inroads in mortgages and personal loans. And in emerging markets, “BigTechs” – large digital platforms, such as Alipay in China – have come to dominate some market segments such as payment systems.

The rapid digital shift resulting from lockdown measures to combat COVID-19 suggests that the pace of change in the banking sector may take everyone by surprise. That acceleration may in turn also hasten the adoption of different forms of digital currencies, including by central banks.

By further reducing entry and exit barriers in the financial-services market, digitalization will increase competitive pressures and constrain incumbent banks’ profitability in the short run. But its long-term impact is more uncertain, and will depend on the market structure that eventually prevails.

One possible outcome is that a few dominant platforms – perhaps some of the current digital giants, plus some transformed incumbents – control access to a fragmented customer base that inhabits different financial ecosystems. In this case, customers would register their demands on a platform, and financial-services providers would compete to supply them. The degree of platform rivalry and level of customer service would depend on the costs of switching from one ecosystem to another: the higher they are, the less competitive the market will be.

Bank regulators have already adapted to the post-pandemic world by relaxing the implementation timetable for capital requirements. In addition, digital disruption will require them to balance fostering competition and innovation with the need to safeguard financial stability.

In order to do so, regulators must ensure a level playing field, and coordinate prudential regulation and competition policy with data policies. This will require navigating complex tradeoffs among the system’s stability and integrity, efficiency and competitiveness, and privacy.

The pandemic and its fallout will test the resilience of the financial system and of the regulatory reforms introduced after the 2007-09 crisis. The first report by IESE Business School’s Banking Initiative last year concluded that these measures had made banking sounder, but that some work remained to be done, particularly concerning shadow banking.

The response to the current crisis will stretch the limits of central-bank intervention – especially in Europe, where sovereign-debt sustainability may become a more salient issue over the medium term. Furthermore, the crisis will test the eurozone’s banking union, which remains incomplete without common deposit insurance.

Banks have a chance to improve their battered public image by playing a constructive role in mitigating the current economic crisis. But with COVID-19 set to accelerate the sector’s digitalization and restructuring, their future could soon become more uncertain.

Xavier Vives, Professor of Economics and Finance at IESE Business School, is co-author (with Elena Carletti, Stijn Claessens, and Antonio Fatás) of the report The Bank Business Model in the Post-Covid-19 World.