Journal of Financial Economics

REF 139-140 Economy, finance and insurance post Covid-19

Despite a sharp decline in earnings, which reflects the impact of the crisis, French banks and insurance companies are proving to be highly resilient. This observation, evidenced by the situation of financial institutions at the end of 2020, confirms our confidence but does not lessen our vigilance: the economic environment is fraught with great uncertainty and we are very closely monitoring financial sector risk developments. French banks are at this stage a key driver of the solutions, and not the cause of a crisis which is first health-related and second economic, but not financial. This generally reassuring situation is obviously in no way a call for a status quo. Banks and insurers are experiencing it: the Covid-19 crisis is acting as an accelerator of their changes in response to the major structural challenges they are facing.

Lorsqu’en 2008 a éclaté la crise des « subprimes », le comité de rédaction de la Revue d’économie financière a pris très rapidement la décision de consacrer un numéro spécial à cette crise et d’associer la revue Risques à ce projet pour couvrir l’ensemble du champ de la finance ; numéro qui mérite encore d’être lu aujourd’hui.

Epidemiology evolved into an empirical science with two quantum leaps: in 1760, Daniel Bernoulli modelled the diffusion of a disease in a population using a differential equation then in the inter-war period a “probabilistic” model of causality emerged. Although they have never been fully integrated into medical school training in France, the prerequisites of these approaches are now taught in the final year of high school.

French insurance companies have faced various economic crisis ever since their birth at the beginning of the 19th century. The study especially focuses on three property and casualty insurance companies: the Assurance mutuelle de la Seine et de la Seine-et-Oise (1819), Cérès (1822), and Les Travailleurs français (1883). In the long run, insurance companies came to a financial stability record in 1914 before experiencing a long decrease in its premium: inflation thus appears to be a symptom of a lasting decline in the firms’ equity until the premium are indexed to the price level.

If a comparison is possible between the plague in 17th century cities and Covid-19, it is because of the confinement measures and their economic and social consequences. These epidemics reveal and increase inequalities. The rich flee, and slums, therefore the poor, are the most affected by disease and the economic crisis. The epidemic ended, the activity restarts with force. In the long term, however, the epidemic accelerates history: it accentuates declining trends but does not reverse - and may even reinforce - an expansionary trajectory.

The European Union (EU) and its Member States have had to deal with the health impact of Covid-19 and the economic and social impact of the decisions taken. Where it was competent to do so, the EU deployed an arsenal of measures. On this occasion, a big step was taken with the Franco-German agreement for a joint loan. But the crisis reinforces the trends at work, exposes the ecological and social fragility of a development model and the internal or external vulnerabilities of the EU. We urgently need to integrate the long term. This could be the role in particular of the conference on the future of the Union.

Pandemics, climate, political tensions, ageing, digital revolution: the “post-covid world” will offer many opportunities to the most agile, but also pose serious collective challenges. In this open and unstable world, individuals and companies will require new forms of protection and responsible economic players. Insurance will play a crucial role in our societies provided that it adapts to this new situation.

The US authorities did not gain all the insight from the simulation exercise called "Crimson Contagion", organised in 2019 by the US  Department of Health and Human Services (HHS), for their  management of the Covid-19 crisis. Crisis management systems do exist but the Covid-19 pandemic showed how much leadership from the top was also paramount. The goal of leadership must be to develop a proactive and reactive system capable of producing the most effective response to any given risk.

This text is extracted from a speech by Thomas Buberl, during the Aix-en-Seine meetings in July 2020. The interview was conducted by Nicolas Beytout. We thank the Cercle des économistes for its kind permission to publish this text.

Like any unexpected shock, the Covid-19 crisis confronts banks with two major challenges: the first is the short-term resilience of the system, i.e. its ability to absorb the shock, and the second is the ability of banks to rebuild their capital cushions in the medium term, in order to be ready for any possible new shock. In the current context, banks also face a third challenge related to the fact that they are an integral part of the policy response. They are called upon to play an active role in the implementation of monetary and financial assistance provided by central banks and treasuries to the real economy. This article discusses these three challenges.

The Covid crisis was an unprecedented economic and financial shock, impacting firms heterogeneously. The asset management industry has faced significant sales from traditional equity funds. But investment flows in ESG funds have been particularly resilient. In a context of strong household savings, the challenge for the asset management industry will be to promote the transition to a low carbon economy. The latest regulatory initiatives taken by the European Commission should help.

In 2020, most industries have had to rethink not only their role, but also what mechanisms to implement to withstand an unprecedented succession of severe, worldwide, and unknown crises. As a key player of the economic recovery plan, expected to ‘absorb shocks’, the insurance industry is facing a double responsibility: supporting its clients in these trying times with an appropriate level of indemnification and quality of services, while having to enhance its prediction capabilities, in order to bring new solutions to an ever- changing risk environment.

A few months after the beginning of the Covid-19 epidemic in January 2020, some lessons can be drawn from the health care management of the virus, particularly on the capacity of the hospital system to cope with this shock. Parliamentary reports and independent evaluations have been commissioned and published, and although the unpreparedness of the health authorities has been strongly denounced regarding the management of masks, personal protective equipment and detection tests, a consensus seems to be emerging: the health care system has been put to the test, but it has held up well and has been able to cope with the influx of patients thanks to the exceptional mobilisation of the nursing staff and unprecedented adaptation efforts both within hospitals and in town medicine, which has made rapid progress in teleconsultation. Far from discussing these observations of the first wave of the epidemic, I propose here to examine the precise conditions of these adaptations, and what they reveal about the capacity for reform, in the longer term, of the organisation of care.

The coronavirus crisis and the controversy over corporate business losses have been a reminder that private insurance companies alone cannot cope with a systemic risk such as a global pandemic. In order to respond to this blind spot in insurability, French insurers are offering to create an original insurance scheme to cover companies against the economic consequences of a major event. A lump-sum scheme, for simple and rapid compensation, based on a public-private partnership.

Investment is a key part of the insurance value chain. The pandemic and the need to support the country economy (re-)highlight this role but also underline the challenges the insurance industry faces. The development of positive values, both from the customer willingness and from the “missions” insurers give themselves, the need to discover – including “in the territories” – the companies of tomorrow, the risk aversion of some customers but also of some companies to the open of their shareholding, the equity/debt balance, the solvency constraints... and above all the respect of the interests of individual investors who are the insurers final customers impose, on all the actors and including the State, a balanced view on how to “ guide” these investments.

While we might have expected a certain rehabilitation of complementary health insurance organisations, the occurrence of a health crisis has only reinforced the lack of knowledge and the operational and financial restrictions that weigh on their activity. AG2R La Mondiale proposes to cross the views of its specialists to learn the lessons of years of being under pressure from public authorities, and to outline the ways in which complementary actors could propose a better balance of roles by rising to the challenges of tomorrow.

Along with a public health crisis, Covid-19 has brought the sharpest and deepest global recession of our lifetimes. With its fundamental value proposition of providing stability in times of stress and uncertainty, the re/insurance industry is at the centre of these developments. As we emerge from this crisis, it's important to understand what the insurance industry, economies and public policy makers can do to increase resilience for the future.

The Covid-19 crisis has significantly impaired trade credit, putting in evidence its vital role in the overall financing of economies. In this respect, credit insurers play a crucial role in safeguarding, smoothing and promoting trade credit.

Joint efforts of credit insurers and States have been fruitful in stabilizing trade financing and economic activity. Nevertheless, a climate of extremely high uncertainty persists in a context where corporate insolvencies are expected to significantly increase at the horizon of end-2021. A perennial private-public mechanism of risk sharing remains key in order to cushion the impact of systemic shocks. Insurers alone cannot absorb large non-diversifiable types of risks when they materialize.

The Covid-19 crisis also evidenced the fact that digitalized companies and countries were undoubtedly more resilient, when dealing with the shock. It means that the nature or definition of risk is currently changing for credit insurers. Beyond the purely commercial and financial aspects of trade credit, inter-companies risks now deal with digitalization, environment, sanitary, social and governance conditions.

This crisis, unlike any other in recent history, is a health and human shock but also, not surprisingly, an economic shock. The response lies in the fundamentals, mainly the quality of the financing of the economy and the soundness of the banks. The latter have risen to the challenge and continue to work tirelessly for all businesses, by taking strong and massive measures, offering quasi-automatic but still customised support, providing input on the recovery, and implementing new projects. Banks, businesses and public authorities came together to get this done: together, we weathered the crisis and listened to the challenges faced so as to address them as much as possible; together, we will revive the economy; and it is together that we will build for the future.

In an exceptional context of crisis, the inevitable increase in public and private sector debt has been effective in the short term. But to meet the challenges of tomorrow, it is now necessary to direct the savings from individuals and institutional investors more towards strengthening companies’ equity. As a result, the asset management industry, a key driver of savings mobilisation, calls for scaling up incentives in favour of sustainable/long-term/equity savings.

Private equity or venture capital is now a better known asset class for investors: private banks, insurance companies, pension funds. This article aims to detail the risks associated with this asset class, particularly during the Covid-19 pandemic.

Governments have responded quickly and appropriately to the economic and financial crisis caused by the coronavirus epidemic. Nevertheless, in many countries, companies will face significant solvency problems. To help these companies, managers will need to rethink their strategy and shift from a generalised cash injection to more targeted support to ensure the solvency of companies with weak balance sheets but a strong business model. This article describes a number of policy instruments and proposes a set of principles on how best to use these instruments to support the business sector without losing sight of some key societal objectives.

This article intends to show that the succession of crises that affected advanced countries since the beginning of this century is the consequence of the dysfunction of their economic and social systems reshaped by neoliberalism. In this sense three weaknesses of these systems deserve special attention. On the one hand, the increase in interdependencies between economies which leads, in the absence of global governance, to spread and get worse the different types of shocks endured by some countries. On the other hand, a loss of resilience of firms whose risk management neglected protections in the face of uncertain events to favour short term profitability. On the other hand a loss of resilience of firms whose risk management neglected protections in the face of uncertain events to favour short term profitability. Lastly the rise of inequalities which make crises more socially unacceptable and more costly to resolve. These flaws raise questions about the desirable evolution of the place and forms of state intervention and more generally about the future of neoliberalism.

The impact of the ongoing pandemic on social spending is still very uncertain. On an exploratory basis, it can be argued that it will probably be limited on retirement pensions, certainly very significant on health insurance expenditure and perhaps only to a large extent temporary on unemployment benefits. With regard to other benefits, it is still too early to say.

In 2020, the world, Europe and France experienced a major health, economic, social and geopolitical (terrorism, etc.) crisis, which will continue into 2021 and leave lasting traces on individual behaviour and life in society. The purpose of this article is to analyse the main facets of this exceptional crisis, focusing in particular on the monetary and financial components of the shock, the sustainable return of States and the prolonged activism of public policies.

Unlike in 2008 during the global financial crisis, emerging and developing countries have been hit hard by the Covid-19 crisis. Each region of the developing world will be in recession in 2020, which is unprecedented historically. The collapse of international trade, investment and commodity prices along with the sudden stop in capital flows are the main channels through which emerging and developing countries will be impacted. Vulnerable countries and people are likely to suffer the most from the economic crisis, putting social stakes front and center. As emerging and developing countries’ financing constraints are painfully binding, public development banks are in a position to help rise to the challenge of building back better.

The Covid-19 pandemic has generated important consequences in terms of geopolitics of energy. The interview conducted by François-Xavier Albouy, a member of the editorial committee of Revue Risques, enabled to understand the extent of the pandemic and to explain the paradoxical effects that could result from it.

Climate change and the Covid-19 pandemic share similarities regarding their causes as well as the responses needed. There are two-way connections between environmental risks related to biodiversity loss and climate change, and health-related risks. There are also relevant analogies between these dimensions, as some of the work conducted on climate-related risks can help set up tools in the field of health. In both cases, potential solutions can be envisioned around three priorities: enhance global governance, correct market failures to regain a form of market rationality, and make sustainable activities profitable through a greater complementarity between private and public investors. The recently created WHO-Europe’s Pan- European Commission on Health and Sustainable Development is an excellent opportunity to explore these avenues, following a “ OneHealth” approach.

Five years after the solemn commitments of 2015 in Addis Ababa on financing for development, in New York on sustainable development objectives and in Paris on climate, the result is not there. The Covid-19, without being caused by a defect in capitalism or a crisis of globalisation, has set the debate in new terms. Will we be able, despite the brutal shock we are facing, to live up to the ambitions that have been set? Will we be able, despite or perhaps thanks to adversity, to make the serious choice of an inclusive and resilient model? Under what conditions? This is the subject of the book I am publishing this autumn entitled Do we (seriously) want to change the world? (Editions Mame), of which I am sharing a few excerpts below.

The world has just experienced the most violent negative economic shock since the 1930s. In the past, such macroeconomic disorders took on an even more spectaculor dimension in the raw materials markets – and more broadly in the commodity markets – which acted as a revelation of all the tensions at play, whether geopolitical or economic. Thus, in 1929, the depression of agricultural markets against a backdrop of global overproduction largely preceded the stock market crash. In 1974, the final spark of the crisis was the first oil shock that set all the markets ablaze for the rest of the decade. In 2008, a major shock on the markets (with the record price of oil at $147 a barrel) preceded the subprime crisis by a few weeks. Nothing like that in 2020. The markets have of course suffered a demand shock, and this in a rather marked context of overproduction: in April-May 2020, most commodities hit low points (even negative in the exceptional case of oil in the United States) before rebounding thanks to the prospect of the Chinese economic recovery. All in all, raw materials were little directly affected by Covid and the outlook for autumn 2020 does not really contrast with the longstanding outlook dating back to January 2020. In the meantime, two “barbaric relics” have stood out, gold thanks to negative rates and iron thanks to Chinese demand: gold and iron, which have almost made us forget the oil follies.

At the end of 2019, the EIB announced its following ambitious commitments. First, the EIB will increase support for climate action and environmental sustainability to more than 50% of annual lending by 2025. Second, the EIB Group aims to support €1 trillion of green investment over the critical decade ahead. And the EIB Group will align all financing with the goals of the Paris Agreement by the end of 2020. For example, the EIB will stop financing unabated fossil fuel energy projects, including natural gas. Then in November this year, our Board unanimously approved our Climate Bank Roadmap. It is an important milestone in our transformation to become Europe’s fully fledged climate bank. The roadmap outlines how the EIB Group will support a green recovery from the Covid-19 crisis, back the European Green Deal and support the Sustainable Development Goals around the world.

In response to the coronavirus crisis, governments have taken unprecedented fiscal measures, which is expected to lead to an historic increase in public debt. This increase will occur against a backdrop of a decadeslong upward trend in public debt. The rise in global indebtedness coincides with a historic weakening of interest rates. In the short term, the low cost of public debt argues in favor of continued fiscal policy to support activity and employment. However, the risks associated with a high level of public debt remain significant, in particular reduced fiscal space to counter possible future economic downturns and a vulnerability to a reversal in market conditions. Therefore, ensuring long-term debt sustainability remains key.

The transmission of monetary policy decisions to the French economy in recent years has been in line with expectations; with a very accommodating monetary policy, the indebtedness of private economic agents has risen rapidly with a significant fall in its cost; French banks have offset the impact on their net banking income of the squeeze on their interest margins with a volume effect. This trend, which was broadly similar among households and non-financial corporations (NFCs), remained however singular in the euro zone, with the debt of French economic agents increasing significantly. In the case of non-financial corporations, recourse to debt was particularly pronounced, even though this trend was accompanied by an increase in the holding of cash. The health crisis accentuated these trends. This one-off acceleration creates a high potential for refinancing debt and transferring risk through securitisation. It also makes the question of rebalancing the financing of French companies between debt and equity all the more sensitive. In this context, private equity funds, which have very significant cash to invest, could play an important role in the exit from the crisis.

Faced with an unprecedented crisis, Member States have simultaneously put in place a quick budgetary support coordinated by the European Commission. The European Commission has authorized about 3 000 €bn of State Aids, 80% of which concern Germany, France and Italy. This public support has been variable both in quantitative and qualitative terms taking variable forms, depending on the budgetary space available in Member States. These disparities fully justify the integrated European recovery plan of 750 €bn proposed by the European Commission. Alongside budgetary measures, the reaction of central banks protected until now the financial system. However, since the beginning of this crisis, the level of indebtedness of firms has increased, going along with a noticeable reduction of average maturities. A historical high volume of private bonds has seen its rating downgraded. More generally, the rating of European firms is going down. In this context, any new shock on the economy could lead to fast and brutal corrections. The challenge for the European decision makers is now to create the conditions of an investment led recovery, financed through capital injection rather than debt and aligned with the long-term objectives of the EU. This is today’s priority for the EU. To meet this objective, Europe will have to be able to mobilise in synergy national and European public capitals and private investments. The relaunch of the Capitals Markets Union project is key on this point of view.

One of the aims of financial regulation is to reduce procylicality. It should help to prevent the financial system from amplifying economic shocks or becoming a source of shocks itself. Therefore, financial regulation was revised substantially after the global financial crisis. The Covid-19 crisis poses the first serious test for this new framework. This article reviews whether regulation has helped to reduce procyclicality this time, and draws lessons for the future.

Monetary responses to the Covid-19 crisis and the Great Financial Crisis have differed in three important ways. Central banks have drawn on tools inherited from the previous crisis and invented new instruments to combat risks of financial system dislocation. The newfound complementarity between monetary and fiscal policies has created new policy space, including in emerging market economies. And both the FED and the ECB have acknowledged the global nature of the crisis and provided international liquidity in dollars and euros. Will there be a “post-Covid monetary policy”? This raises three fundamental questions. By making their goals even more elusive, will the crisis force central banks to rethink their strategies? Will the current “marriage of convenience” between monetary and fiscal policies subordinate central banks to fiscal imperatives? And does the pandemic risk fuelling public ambivalence towards central banks, increasing discomfort with their power and independence while raising expectations of additional action?

Global capitalism has undergone two systemic crises in twelve years, the Great Financial Crisis (GFC) and the Covid-19 crisis. The trigger was different, but the expansion of private and public debt over the financial cycle has generated similar financial vulnerabilities through interactions between debt and liquidity.

We study the dynamic of liquidity in both systemic crises to display the crucial role of money in the momentum of the financial cycle. We compare the financial linkages that have led to the drying up of liquidity in both crises.

We show the crucial role of central banks that have overstepped the limited and temporary role assigned by the utility theory of money to the lender of last resort. Money is the basic social link of market economies and the central bank is the institution safeguarding monetary sovereignty in crises.

Central banks have innovated to take care of the money markets entirely and to supply credit to the non-financial private sector in tight coordination with governments.

The irruption of environmental risks, exhibited in the pandemic crisis, allows concluding that central banks will be core actors in the transformation of capital markets required by sustainable development. Macroprudential and monetary policies should be implemented closely.

After reflecting on the outlook for inflation in the future and rejecting the thesis of a return to deflation in both the United States and Europe, we wonder the following question: how will the budgetary solvency of the States be restored after the considerable increase in public deficits? Most countries today reject an increase in fiscal pressure because of its effect on growth; we can no longer rely on the inflationary tax to restore the situation of public finances, which is a central point. The new type of taxation that will emerge and which will ensure budgetary solvency remains to be defined; it will be seen that this is a double taxation of a rather detestable nature.

The pandemic is accelerating a twenty year phenomenon: accounting standards are no longer adequate to describe investment behaviors. Moreover, the Precautionary Principle has resulted in an inflation of accounting standards. In the context of the pandemic, what are the consequences for investors?

C’est la deuxième fois que Risques s’associe avec la Revue d’économie financière pour produire un numéro commun. La première fois, c’était en 2008 à l’occasion de la plus grande crise financière que le monde ait connue depuis 1929.