An in-depth article on 23 June 2020 by Robert Armstrong highlights the great risk in the US economy from too much personal leverage. The impact of COVID-19 on the ability of people to survive as their sources of livelihood are substantially interrupted is clearly detailed in this article. Unlike the virus itself, the impact is not likely to be immediately visible but over time the impact on asset quality for financial institutions that have provided the loans to these individuals will be felt.
A few days later, Rana Foroohar in the Financial Times of 28 June 2020 focused on the impact of COVID-19 on small businesses. Her sobering analysis correctly notes that the real damage from COVID-19 will not be felt by the larger corporations and banks initially but rather by the numerous small entrepreneurs that have always lived a more precarious existence. Although individually these entities are not critical, collectively they have significant influence on the real economy. Their challenges will work through the economic system impacting larger corporations as well as banks of all sizes. As with the entrepreneurs, smaller community based banks are likely to be impacted first but that impact will work its way through the banking system.
These challenges will be a major risk for the economic recovery from COVID-19 and should not be underestimated. The question for many banks should be how can they support these critical entities whilst also maintaining credit standards. A truly difficult dilemma facing the banking system and the economy.
