COVID-19 and the Banking Industry: Risks and Policy Responses

"The Coronavirus Disease 2019 (COVID-19) pandemic has caused widespread economic disruption. Millions of businesses were forced to shut down and unemployment soared. The weakened economic conditions are likely to have implications for the financial system, including for banks and the banking industry. Many bank assets are loans to households and businesses, and banks rely on the inflow of repayments on those loans to make profits and meet their obligations to depositors and creditors. If repayments suddenly decline, banks can become distressed and potentially fail. Bank failures can be especially disruptive to the economy because they remove an important credit source for communities, and the financial system can become unstable if failures are widespread. Banks can absorb unanticipated losses on loans, to a point, by writing down the value of the capital. Thus, two key factors in how well banks weather the adverse economic effects of COVID-19 are (1) how concentrated their assets are in loans to households and businesses, and (2) how much capital they hold to absorb losses.

Bank data reported as of December 31, 2019, suggest the industry as a whole is relatively well-positioned, compared with recent history, to endure losses on household and business loans. In general, banks hold high levels of capital, largely due to changes in bank regulation and behavior made in response to the 2007-2009 financial crisis. However, certain segments of the industry, such as banks holding high concentrations of household loans, business loans, or both, are more exposed to losses and have less capital relative to those exposures than the industry as a whole. For example, household and business loans make up more than 70% of total assets for 535 banks (roughly, about 1 in 10 banks). These banks, on average, have less capital buffer relative to the size of those loans than most banks. By one metric, 87 banks are in danger of becoming seriously distressed..."
COVID-19 and banking