CEO of major Asian bank says ‘a big, big challenge’ is looming for the global economy

Read? CEO of major Asian bank says ‘a big, big challenge’ is looming for the global economy

Banks could experience “far more damage” to their balance sheets when stimulus measures that are keeping many businesses afloat are rolled back, said Piyush Gupta, group CEO of Singaporean lender DBS.

He explained that governments cannot keep supporting the business community financially, so “you’ll start seeing a lot more default, which in turn means that you’ll start seeing the problems spill over to the financial sector.”

But banks globally have also entered the current pandemic-induced crisis on stronger footing and can take on “a lot more pain” compared to the global financial crisis more than a decade ago, he added.

“If a lot of companies are not able to survive ... you’ll have this million-dollar question of how do you deal with these ‘zombie companies,’” said the CEO.

“Do you keep putting money ... using public finances to support companies or do you let creative destruction happen a la Schumpeter? This is going to be a real challenge particularly in the SME space around the world, I suspect this will be a big, big challenge next year,” he added.

Gupta said DBS — the largest bank in Southeast Asia — has taken “some fairly draconian assumptions around the number of SMEs that are likely to be unable to survive” in its internal stress testing. He warned that the ratio of bad loans could be worse than the level seen during the global financial crisis.

“I think you will see more stress on the financial system in the later part of this year and next year without a doubt. And that’s just because the fallout of the macroeconomic shock has still to filter through the financial system at this point in time, I think it will come,” he said.