Credit rating agency Moody's Investors Service says identifying the long-term consequences of the COVID-19 crisis will be "paramount" for credit analysis
In a report entitled The coronavirus experience will likely change habits and reshape business models, Moody's says although many of the longer-term consequences aren't yet known, there are three main areas where it identifies an enduring impact for financial service providers.
"First, we expect the resulting global economic recession to compel central banks to maintain low or even negative interest rates for several more years and to drive governments to increase fiscal stimulus with uncertain long-term consequences and varying implications for banks and insurers, not least a profit squeeze. Second, the outbreak will be a powerful catalyst for an accelerated migration to digital processes and services by both consumers and businesses. Third, the pandemic is accelerating a shift away from shareholder primacy towards addressing multiple stakeholders, such as clients, employees and the wider society, and driving an acceptance of a stronger social aspect to corporate strategy," Moody's says.
On its third point, Moody's says the health crisis and economic hardship are increasing attention on corporate social behavior, accelerating a shift in focus to a wider range of stakeholders. Notably this week JPMorgan Chase CEO Jamie Dimon told employees he hopes policy makers use the COVID-19 crisis as a catalyst to rebuild a more-inclusive economy as the pandemic exposes stark inequalities.
"Some corporations are shifting their strategic narrative from shareholder primacy to greater emphasis on the needs of other stakeholders, such as employees, clients, society and the environment. Such moves respond to broad societal trends and have gained traction among leading CEOs and prominent investors. We expect the rising economic hardship caused by the pandemic to accelerate this nascent trend toward stakeholder rather than rentier capitalism. High structural unemployment caused by the sudden transformation of consumer behavior and long-term depression in certain industries may support such sentiment," says Moody's.
The credit rating agency expects banks and insurers to be part of this.
"The traditional role of banks was long accepted to be that of providing a service to broader society. Prudential regulations exist partly to balance the natural profit-seeking tendency of capitalistic institutions with the need to maintain financial stability and the wider social good. The balance between these two forces has shifted in favor of the latter since the global financial crisis, in response to the perception that the financial industry received an excessive share of economic rents."
"The shift is now likely to be reinforced in favor of the public good. Many banks are offering mortgage and other loan relief, mostly but not solely in response to political pressure. They are expected to channel massive public funding toward both the corporate and household sector, with public authorities determining in part the credit criteria, pricing and management of these loans. This additional mandate will reduce a bank’s ability to act in a purely commercial manner," Moody's says.
"Moreover, banks in many systems have been, in effect, ordered to cancel shareholder dividends and stock buybacks whether they are profitable or not, and regardless of their balance sheet strength. This 'social' aspect to banking, spotlighted under our environmental, social and governance (ESG) framework, highlights the fact that banks are likely to be constrained in their ability to act as fully free agents for some time, which may act as a constraint on a significant, sustained recovery in profitability for years to come."
On April 2 the Reserve Bank of New Zealand said it was restricting banks from paying dividends on ordinary shares and from redeeming bond issues until “the economic outlook has sufficiently recovered”.
Meanwhile, Moody's says the COVID-19 pandemic and social distancing measures established to contain it are causing an unprecedented economic and psychological shock across the globe. The experience will be a defining event for many societal, business and credit trends, it says.
"The crisis has accelerated existing disruptive trends and is causing a rethink of conventional habits, potentially reshaping business models, consumer preferences and competitive dynamics...Identifying the long-lasting impact of this experience will be paramount for credit analysis."
Moody's notes in the financial services sector, social distancing has created a surge in demand for online commerce, contactless payments and digital cash transfers.
"The sudden and extreme experience of the pandemic is proving to be a catalyst where old habits are suspended, allowing consumers to experience new digital ways of accomplishing trade and commerce. It is probable that customers who have newly converted to novel ways of working and shopping may not fully return to their old ways when restrictions are lifted, as a result of gains in functionality, user experience and utility."
Moody's argues financial services companies stand out as a key beneficiary of the work-at-home trend.
"They are expense-heavy information-based businesses, in which most of the work can be done remotely, and potential cost savings are considerable. Those firms that more permanently and successfully adopt elements of remote working should have more cost savings to realize as this trend progresses, giving incumbent financial institutions an opportunity to close a portion of their costs gap with online-only digital challengers. Well established incumbent institutions may also benefit from a 'flight to safety' where customers in times of crisis gravitate toward institutions they are familiar and comfortable with. For banks, this effect may be most powerful in the custody of assets and low velocity core banking activities," says Moody's.
"But digital acceleration has also brought risks to incumbents. The convenience and universality of tech companies like Alphabet Inc.'s (Aa2 stable) Google unit and PayPal (A3 stable) for online business transactions or Venmo and Apple Pay for contactless payments will be hard for incumbents to replicate. Efforts by incumbent banks to securely provide rival digital payment platforms such as Zelle are a good, but possibly insufficient, response."
And as interest.co.nz reported on Monday, the Financial Stability Institute, part of the Bank for International Settlements, says criminals are exploiting vulnerabilities created by COVID-19 lockdowns, increasing the risks of cyber attacks, money laundering and terrorist financing.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
47 Comments
I've seen the opposite of a trend to stakeholder capitalism so far in this crisis.
Employees = Redundant
Prices = Increased
Environmental goals = Parked
Turning the screws on suppliers = Increased
All in the name of protecting capital/returns.
If anything, I'm seeing a revert to type.
It's not up to business to decide what the trends are.... the $ votes will decide.
Firstly, a business needs to survive the immediate shock of not being able to trade, then turn-over enough business to survive the next 3-6 months to allow for dust to settle and see what shape the market is in... Unless you have large appetite for risk, un-canny insight and deep-pockets, now is not the time for radical investment in changing your business model.
I'm not sure about others, but, I have moved more towards supporting smaller, kiwi-owned business as much as I can. As long as $ difference is not too significant, I will continue to do so.
This is a delusional feel good article. We are in a depression and to call the outcome now is impossible. A little humility is in order.
Also, "the banks" in the US don't offer mortgage relief that is the mortgage servicers job. This has "written by an intern" all over it.
"First, we expect the resulting global economic recession to compel central banks to maintain low or even negative interest rates for several more years..
The whole world has an interest rate problem – starting with the fact everyone still calls lower rates stimulus. Eurodollar futures aren’t suggesting a high probability of renewed ZIRP because of some convoluted R* theory (which conveniently would absolve monetary policymakers of twelve years of failure and incompetence). Investors are betting on constant liquidity risk, or the same thing which is driving European bond yields further and further underground.
Global interest rates, global money. Take it from here Milton Friedman:
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die Link
I here ya...
I think the conditions now are stronger towards social responsibility now though. Watching closely the events in US as unemployment, food-bank cues and desperation set in to see what this does to the tone in Government and Corporate America!
Shocks this big upset the citizen... something drastic will need to be done to acquiesce the danger of outright anarchy.
Oh please. The only way anything in the article talks about will come true is if there is a significant change in the laws that govern the current economic system. And in a globalised world they would need to be agreed by all countries. Getting cross border agreement on any issue looks less likely now than any time in the past 30 years.
The only thing we have seen so far in this crisis is reckless abandon from Reserve Banks who claim to be supportive of "the little guy", but print money and hand it to asset and big business owners. I haven't found a shred of evidence any ruling party wants to change this. The cancelling of dividends, for instance, is a protection measure to ensure banks don't fall over - because they might if they don't start holding more capital. That SUPPORTS the current business owners of the bank who caused massive bubbles, with the side effect of potentially propping up a company that may have failed and therefore taught them a lesson. The rampant printing of money ongoing around the world is clearly flying to the top, breaking with all the platitudes of those printing it. Which is why without a fundamental shift in how/where capital is allocated caused by significant reform of a clearly broken system, it will simply continue if not accelerate. It's so corrupt now that they don't even try to hide it - just check out the Fed's deal with Blackrock (which Blackrock are using to bail themselves out) which shows who they are really interested in protecting.
As Dalio points out, unless the rules of the current form of capitalism are changed, it will likely result in either an internal or external war for the US. What happens there will influence the whole world. So yes change is required, but those holding most of the pie want status quo...I mean who wouldn't? But history would suggest, unless they're prudent to the have nots, they'll be the first on the guillotine when the crowds circle with pitchforks.
Outside of quasi state controlled funds, I'm yet to see an analysts appraisal citing corporate social responsibility as a portfolio weighting element in its own right unless it is able be identified as having a directly causal impact on return on capital. Investors are even wary of corporates that have governance gender balance policies, fearing the board focus may not be sufficiently on the bottom line. The notion that equity owners will convert to a wider stakeholder perspective during these recessionary times when simple survival and capital preservation are paramount, is fanciful.
Ahhh right, so nothing is wrong with the explosion of inequality, the massive distortions we see in asset markets, the environmental destruction on a global scale all based on a system that is designed to spend future earnings now via a system that believes infinite growth in a finite planet is possible. Apparently that is a system we should be proud of and not try to reform huh?
While concurring that growth cannot continue forever we cannot identify when the discontinuity will occur. In the 1890's they were predicting London would collapse by 1920 because the horse dropping would become over 2 metres deep. In my lifetime the ratio of the weight of domesticated animals to wild animals has altered from 50-50 to 99-1; a sign that we may be near a limit.
Our current global system has some remarkable and unique in history properties that I would hate to lose; the decline of absolute poverty faster much faster than even the aspirations of the UN, rough equality for women, minimal slavery, the middle class out numbering the lower class. Globalisation needs serious adjustment not abandonment.
We haven't destroyed the natural world but we are close to destroying a natural world that will support humans. Cockroaches and microrobes will continue to exist and evolve. We have real problems trying to get rid of rats but managed to wipe out the passenger pigeon without really trying and without modern chemicals - it is said 200 years ago they probably outnumbered all the other birds in the world. Meanwhile NZ cannot manage to protect our fisheries.
Inequality meaning what?
Inequality of opportunity - or - inequality of outcome?
Given more people in the world left extreme poverty (UN definition) in the last 20 years than ever before in history I am not at all certain your claim that there has been an 'explosion of inequality' holds water. At least not without much more qualification, it is almost certainly not true in a whole of world sense.
I stayed in Queen Street, Auckland this week and the lack of pedestrians is obvious, along with the road being reduced to one lane each way and very little parking.
That is the clue to the next few years, work from home is now a preference and there will be very few tourists.
In contrast is the districts, Northland, people are out dining, spending money, life has continued unchanged.
No economic theory required to see the impact of a pandemic.
It is idealistic to expect the highly competitive world we live in , to suddenly change and become more caring.
In business , there is vigorous competition between businesses for customers , and within individual forms there is great competition between "stakeholders" ........shareholders , owners , managers , workers , customers , the state ( as collector of Taxes) and the public at large .
Even as a nation we compete for everything , from being world cup rugby winners..... to competing for FDI , to being the " first" , to get the highest GDP , the best living standards , to be the happiest , wealthiest , most successful .......whatever
This will NEVER change , and while some may have an upper hand from time to time , the free market soon levels it out
Humans have their own self-interests as paramount , fundamentally we are all greedy , and when we are not successful we become resentful
You demonstrate a clear lack of understanding of all human nature, especially the more feminine side of it. People DO put their own self interests aside, unfortunately the greedy see that as a sign of weakness and take advantage. It is only the greedy who are greedy, What I have said is demonstrated beautifully by the absolute sacrifice of the foot soldier.
Freedom creates competition because I can choose what I buy and where I buy it.
That principle has nothing to do with greed. And whether I like a blue bike over a red bike has nothing to do with selfish.
Not saying greed isn't a thing, it most certainly is. But it is not created by competition or freedom. If that were the case then oppressive totalitarian regimes would have ended greed and selfishness.
That some form of massive change is underway seems self evident. And yet this is contradictory to what is being experienced. Stock market goes up, housing, who knows? The govt pays everyone, buys everything, lends to all.
Economic disaster? Nah, the rbnz saw it coming, and nipped it in the bud.
The status quo is now so far removed from reality, kept alive on endless, in fact infinite currency printing, with near zero interest rates for ever.
The finance industry has done a fantastic job of making sure that those indebted are the stakeholders of choice, and highly indebted people tend to show high loyalty to those that allowed them the privilege of such indebtedness.
Only a complete and devastating collapse has the power to change this status quo, and the loyal slaves to massive debt, and the owners of crony capitalism will carry on believing in the immortality of their wonderful system.
Some (like Ray Dalio) see that empire ends, and it's not those heavily invested/indebted stakeholders that see it coming.
Unfortunately the globe is not as cohesive and cooperative as many Nz'ers would like to believe, and there are enormous powers that would prefer a different system to the fake one we live in.
The world of trade and finance is breaking up, and there's a new core that would be prefer to produce, sell and be paid.
A new system will not be created by those that are responsible for the present one.
Those that firmly believed the marketing brochures of the Titanic were the ones sitting calmly ordering tea, feeling totally confident, not in a lie they were fraudulently sold. No, it was a lie they firmly believed in, and willingly purchased the tickets for.
With regard to zero interest rates forever, I do not agree. If you look at the interest rate cycle for the USA its set to start going up again in 2021/22. The only way for the USA to get rid of this debt is to hyper inflate it away. My pick is a short term of deflation and reduced asset prices for a couple of years and then the interest rates will start going up. I really wouldn't be getting maxed out on the mortgage right now thinking these rates are here to stay forever. The RBNZ cannot counter the unemployment numbers and there are now forces at play that they simply do not have enough control over. The next few months the data is going to be really shocking and the next election will be all about the economy and the ability to deliver a recovery.
Yes Carlos67, I agree. I was attempting to say that a belief in near zero rates forever can be likened to believing the titanic will never sink.
I couldn't agree more that interest rates will go up. However the system has set a trap for itself, if it puts interest rates up, even if it starts with quantitative tightening, the economy recoils.
Inflation will begin to increase, and still the rbnz will do nothing. Then inflation will go higher, and once the rbnz, in fact all privately owned central banks, see that inflation could blow out to hyperinflation, then they will raise interest rates. It will be too little, too late.
I think the system is on a one way course to complete self destruction.
A greater majority on the titanic were convinced of it's indestructibility, while those that woke up to the illusion first were already at the lifeboats when the others became stricken with panic, or remained firm in their beliefs, and simply ordered another drink.
So many, even on this forum, have a firm belief that the usd will never collapse, that it will always be the global reserve, that the usa will always be the global superpower.
Yet we all know that there is no such thing as forever, and those think in this manner are the delusional ones.
Those with an open and inquiring mind are already researching, examining, and repositioning themselves. I would place you Carlos67, firmly in this group.
All the best.
It's incredibly common. The federal reserve is privately owned. Owners recieve 6% return each and every year.
The rbnz is completely independent of the nz govt. It's not so easy to see how it's privately owned, check out their website. For services provided in assisting in the production of money, there is list of companies and "interests", that recieve "fees".
This group is called ClearNZ. They are listed on the rbnz website. Then go check out " who owns the Reserve Bank of Australia ". Low and behold, it's ClearAus.
If they were part of the govt, money would simply be issued directly from the treasury. Instead, new money is raised as a debt against the treasury.
Hence we have a global financial system, and privately owned central banks sit at the head of a system that prints currency, otherwise known as debt.
Do some research, you'll be somewhat surprised. None of this is secret, it's just our secondary school economics education skips over quite essential parts, which are not that difficult for most to understand.
The entire system is built by issuing debt, and then more, and then more.
That's why the system is always looking to create inflation.
Really? Can I have your source on RBNZ ownership? This is what it says in the RBNZ FAQs:
"The Reserve Bank does not have shareholders. It is 100 percent owned by the New Zealand government, with any extra revenue that the Reserve Bank makes going back into the Crown accounts. The Reserve Bank is not a government department, but is a body corporate whose finances are included in the Crown accounts."
https://www.rbnz.govt.nz/faqs
Does the Reserve Bank own shares?
New Zealand Central Securities Depository Limited (NZCSD) is a wholly owned subsidiary of the Reserve Bank of New Zealand. NZCSD does not actually trade, but acts as the legal (registered) owner of securities that are beneficially owned by members of the NZClear real-time settlement system. Read more about NZClear and NZCSD.
Members of the NZClear system include banks, fund managers, custodians, trustee companies, investment funds and insurance companies etc. Currently the value of all securities in NZCSD’s name is $245 billion, including shares with a market value of about $50 billion.
The Reserve Bank and NZCSD do not have a beneficial interest in these securities, with the ownership rights and investment risk lying with the beneficial owners, who are free to deal with the securities in the system.
NZCSD is merely a custodian trustee which administers the shares on behalf of the beneficial owners, with the NZClear system allowing beneficial owners to electronically settle transactions of the securities that have been lodged into NZCSD’s name.
This is from the link at the top.
As I had said, seeing that the rbnz is privately owned is not readily apparent.
The beneficiaries of NZclear are just that, those that benefit directly from the process of printing money into existence.
Here's the "participants". It's a long list, including jp morgan and other very interesting names, aswell trustees that have no name.
https://www.rbnz.govt.nz/markets-and-payments/nzclear/nzclear-participa…
All government payments are made by the reserve bank crediting bank accounts with newly created money, This creates reserves for the commercial banks. Only the government can create bank reserves, bond sales are used later to set the amount of reserves that the banks hold for the purpose of interest rate settings, not to finance the governments spending. An explanation here. https://neweconomicperspectives.org/2011/10/mmp-blog-22-reserves-govern…
Excuse my naivety here but how has Japan avoided hyperinflation for 30 years? NZ is merely a weaker, less diverse, smaller copy of their 80's bubble situation no? As long as central banks go around buying everything up we are in low interest land for the next few decades? Or was Japans QE measures a blip on the radar compared to what we are going through now..?
I don't know all the answers here.
When BOJ started it did start very small, just $20B a month. But it's been buying 'unlimited' government bonds for a years now.
But the real question may not be why the hyperinflation has not happened, the real question may be, why are they not out of the woods? Because if they are not out of the woods then perhaps they will at some point pay for their unlimited bond purchase program with currency collapse, bond market collapse, or hyperinflation. Or all of the above.
Is Japan proof that debt based cause and effect have disconnected, or is it just a timing issue?
Only time will tell.
The Japanese are very good savers and they don't consume very much. It is the spending of money that creates inflation and savings do not. If the Japanese consumed more then the money could be taxed back and cancelled.
The NZ economy runs on bank created credit rather than government created money and that is why our household debt is at such high levels.
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