It is too soon to assess the impact of Covid-19 – but we know it is terrible in health, social and financial terms. The eventual impact will be determined by the virus itself and how governments mitigate it – can a vaccine be developed, and if so, how quickly?; do people who have caught the illness and recovered obtain immunity to prevent them catching it again?; can anti-viral drugs be developed?; can immunity enhancing drugs be used?; and how will Covid-19 mutate?
With the answers to these health-related questions unknowable at present, it is impossible to predict the likely extension of social distancing measures, or therefore the financial toll on the global and national economies and individual co-operatives. But we can say positive things about the leadership of the sector. Both Co-op Group CEO Steve Murrells and Nationwide Building Society CEO Joe Garner have volunteered for 20% pay cuts. Meanwhile, several large mutuals have adopted generous support packages for staff who have been quarantined.
Financial mutuals are in particular difficulty. Many financial support measures adopted by the government are being implemented via the financial institutions: the banks, building societies, credit unions and insurers. Businesses are to receive emergency funds via the banks, through new loans, while individuals have been told by regulators they can extend overdrafts, loans and card repayments. This will inevitably lead to more loan defaults.
In the United States, the largest banks have already increased provisions for loan losses. Initial assessments are equal to about an additional 7.5% of annual defaults. The banks also reported reduced income of nearly 50% in the first quarter.
Similar effects are likely in other countries, with the Office for Budget Responsibility reporting that the UK economy reduced in size by 35% during the initial period of the crisis. British banks had to abandon £8bn of proposed dividend payments, after pressure from the financial regulator. Lenders for car purchases report requests for relief on loan repayments have risen by 20 to 30 times their normal level.
Administrative challenges are immense. Commercial and personal customers in the UK have complained about the problems in accessing financial support, with call centres overloaded with enquiries. The Building Societies Association’s spokeswoman Amy McCluskey said: “Along with the rest of the financial services sector our members have been facing significant operational challenges for the past month and more. They have been working flat out on issues that affect the health and wellbeing of both customers and staff, whilst grappling with very practical operational challenges such as a circa 30% staff absence rate, and moving staff onto home-working.
“A lot has been achieved including these two examples. Keeping around 90% of branches open – most on reduced hours and for essential transactions only – whilst observing social distancing. This has been particularly important for vulnerable customers who require access to cash as they have no other form of banking product. Granting around a quarter of a million three month mortgage repayment holidays to give those affected a breathing space.”
Mortgage lending is under serious pressure. “Clearly the economy generally and employment and the housing market specifically will take some time to recover and this will have a widespread effect going well beyond our sector,” added McCluskey. “So we are well aware that we are in this for the long haul [ensuring that] the sector is well positioned to not just cope but play an active role. The sector is well capitalised, having built its financial resilience up since the financial crisis of 2007-9.”
The Nationwide Building Society is unable to discuss the financial impact on the society in the run-up to its results announcement. It said administration had been kept going because of the positive attitude of its staff. The society’s spokesman said: “Hundreds of our colleagues have volunteered to support our member-facing teams, and we are deploying this additional resource to help with the increased demand.” Nationwide is asking members to move to online transactions where possible, to reduce demand on branches and call centres.
Many enterprises have criticised insurers for declining claims on business interruption policies. But insurers, including mutuals, are fearful of the impact if they too generously pay out on these policies. NFU Mutual – which provides cover to the farming sector – warned customers: “In line with UK market practice, our standard business interruption cover usually requires damage to property, such as storms or fires, in order to be triggered, which means the majority of customers will not be covered for coronavirus. At NFU Mutual, we always seek to support our customers wherever possible and will look to extend cover whenever we can. However, as a mutual, one of our duties to our members is to remain solvent. Global pandemics such as coronavirus require a much larger solution and financial package from authorities and central governments than is possible for insurers to provide.”
NFU Mutual is, though, providing £32m of support to customers and communities, including an increase in cover. This is expected to provide £12m of pay-outs for members affected by the illness this year.
Credit unions are especially concerned about the impact on them, with a number having ceased trading as a result of the Great Recession. The Irish League of Credit Unions – which has members on both sides of the border – has requested the Irish regulator to adopt some flexibility in rules enforcement, to allow credit unions to provide greater assistance to members in financial difficulty.
ABCUL, the Association of British Credit Unions Ltd, admits that the latest crisis will place pressure on its members. It is now working with the UK government, regulators and the devolved governments in Scotland and Wales to enable it to provide financial support to people in need. “Our requests are seen as critical to ensuring the ongoing sustainability of the sector and in supporting our ability to assist members who need it most at this time,” said an ABCUL statement.
ABCUL has worked with Fair4All Finance to provide £5m from its resilience fund to credit unions and community development finance institutions (CDFIs) in England. In Scotland, the devolved government has established dedicated funds to support credit unions through the crisis, including a resilience fund as well as £20m of loans and grants.
Robert Kelly, ABCUL’s CEO, said: “These support measures will undoubtedly assist credit unions across Britain and we look forward to supporting and assisting credit with these initiatives in the weeks and months ahead. ABCUL has hosted online conference sessions with credit unions from all over Britain to identify issues of emerging concern and ensure these are addressed and the business strengthened to deliver essential financial support to members and to staff.”
While it is too early to assess the financial impact of Covid-19, leaders of mutuals have recognised that the crisis provides an existential threat to many businesses. In this they are showing they have learnt from global Great Recession of just over a decade ago, when many of the institutions were guilty of complacency, leading to the failure of some. But this time it is different – this crisis will severely damage the strong as well as the weak.