Daily Commentary BY THE CURVE TEAM –

A ‘Long Battle Ahead’

28th of May, 2020

As the initial economic and financial shock from Covid-19 starts to pass, the real battle still lies ahead according to APRA Chair Wayne Byres.

In a speech to the Board of the International Banking Federation yesterday, the APRA Chair gave an insightful account of the impact of the latest pandemic and the implications for the financial system. The good news is that measures put in place after the GFC have meant that the banking system is acting as a shock absorber this time around rather than amplifying the fallout.

The bad news is that the real battles still lie ahead. In his opening remarks he highlighted that “measures to backstop liquidity have worked well and bought us time, but solvency pressures are mounting as credit risks come to the fore.”

To that end, he went on to say that:

“One thing we all need to bear in mind as we deal with the immediate crisis is that, once we overcome the virus, the world will not simply pick up where it left off in January. While I cannot predict its precise form, this crisis will almost certainly precipitate enduring change in the way society operates. The idea that we’ll employ some temporary measures and then everything will ‘go back to normal’ is therefore a dangerously naïve one on which to base our decisions. Flexibility and agility will be important – we have a long battle ahead.”

Truth be told, no one really knows how the world will look and operate once the crisis subsides. We haven’t seen the global economy come to a standstill and attempt to restart while the pandemic is still largely prevalent around the world. It will take considerable time to know what the new operating environment will look like once temporary support measures are removed.

Importantly though, the current crisis will end with Byers saying:

“Whether through herd immunity, a vaccine or a determined campaign of social-distancing, this crisis will eventually end. Businesses will reopen, economic activity will regenerate, and unemployment will subside.”

David Flanagan

Director - Interest Rate Markets