March 17, 2020

Banks and Credit Unions Should Expect Increased Delinquencies Due to the Coronavirus

EXCERPT: Banks and credit unions will certainly see stress in their portfolios and increasing delinquencies due to the coronavirus, prompting them to revisit their loan portfolios to hedge against risk.

The continued spread of the coronavirus is impacting the economy, and banks and credit unions will likely see an onslaught of delinquencies as a result.

In addition to the 127,000+ people who have been infected and over 4,700 people who have died from the coronavirus, the pandemic is also wreaking havoc on national economies. Businesses large and small are realizing significant losses with just about every aspect of consumer spending being affected. And banks and credit unions may need to brace themselves of what's to come; namely, a rise in delinquencies as the coronavirus continues to spread.

With consumers and businesses financially affected by COVID-19, spending power may be limited, which can make it difficult for current loans to be paid on time and in full every billing cycle. The ripple effect will involve delinquent loan assets on the books of banks and credit unions, who will need to expect such instances and prepare for them appropriately.

Banks and Credit Unions Need Support From Federal Regulators

Right now, temporary measures are being implemented to handle tight finances over the short-term, and they seem to be effective. Financial institutions are doing what they can to work with their customers to help them cover cash crunches temporarily. Banks are completely capable of handling any short-term issues on their own.

But over the long-term, such band-aid measures won't be enough. If the issues get much worse, personal financial issues will turn into fiscal issues. Banks and credit unions will be left dealing with delinquent assets that can risk the health of their balance sheets, prompting much-needed federal support and intervention.

Lawmakers are urging regulators to give financial institutions more leeway to work out loans with individual consumers and businesses who are feeling the brunt of the coronavirus. Banks that are sympathetic to their customers who are more of a credit risk and are working with them to deal with their financial difficulties should not be penalized. Instead, what banks need is the ability to work alongside regulators to handle things effectively with minimal impact.

Interest rates are expected to be cut once again by the Federal Reserve, further squeezing banks' margins.

Airlines and passengers are canceling flights. Sporting events and conferences are being called off. Global supply and trade are being squeezed. It's a situation that is having dire effects on the global economy, and we have yet to see the situation flatten before it gets worse. In the meantime, consumers and businesses are suffering, and the banks that hold their loans will also feel the effects of customers being unable to fulfill their loan payment obligations.

Federal intervention is not a tall order. It's standard for the Fed to encourage banks to help their local communities in times of financial need when extremes such as business and government shutdowns occur.

Low Interest Rates Also a Sore Spot For Banks

There's also the issue of lower interest rates, which traditionally cut into banks' earnings. The Federal Reserve already slashed rates three times in 2019, squeezing banks’ lending margins. But with the coronavirus situation worsening, it's increasingly being expected that the Fed will cut rates down to zero at its meeting next week. That's a change of heart, considering banks were not expecting any further cuts in 2020.

Banks Urged to Revamp Their Loan Portfolios

With the current economic uncertainty looming as a result of the coronavirus and its expected spread and worsening impact on the US and the world, financial institutions must do what they can to protect their loan portfolios. And that means selling off risky assets as soon as credit risks present themselves and acquiring stronger short-term assets in their place. And Garnet Capital can help facilitate these transactions.

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