Financial Shockwave: Credit Default Impacts by the Current Coronavirus Crisis
By Chuck Qi
Current coronavirus pandemic is bringing on economic recessions around the world. As of now, signs of deterioration have emerged in the US: more than 17 million unemployment filings, March unemployment rate reached 4.4% right after historically low rate of 3.5% in the previous month, small businesses closed or bankrupted. At the same time, US and other countries are issuing relief plans to rescue world economies.
Since this financial shockwave started Feb-Mar 2020, one can expect subsequent credit events in next few months, such as rising loan defaults, bankruptcy filing wave and struggling banks and credit unions. This article is trying to discuss the impacts to credit losses in the US financial services industry.
The current downturn is resulted from a nonfinancial reason, virus, while other economic elements did not show bad signs. As a comparison, the 2008-2009 subprime and 2001 dot-com crises had financial stress signs before, such as aggressive investments, overexposed mortgages and financial instruments. Additionally, unemployment numbers also support a temporary stress. Out of 713K job reduction in Mar., 89% are in top 4 categories: leisure and hospitality (64%), education and health services (11%), professional and business services (7%), and retail trade (6%). However, the three out of four industries were hiring aggressively in previous 12 months (Mar 2019 – Feb 2020, 2.1M total new hires): leisure (18%), education (32%) and professional (19%). The retail industry was almost no growth in the previous period. From these observations, the unemployment impact is mostly kept in the leisure and hospitality industry.
Targeted government’s relief plans will provide substantial monetary helps to small businesses and unemployed population. If the unemployment is not widespread and the virus is contained, the recovery time will be faster than others.
By these assessments, this wave of credit losses should have following characteristics:
1. Financial institutions with concentrated small business loans are at risk, especially for those who have exposures in the leisure and hospitality (such as restaurants, gift stores, transportations and hotels) industry.
2. Impacts on consumer products are more severe on unsecured loans (like credit cards and personal loans) than on secured ones (such as mortgages).
3. We will see defaults starting May or June and hopefully reaching peak before the end of the year provided the virus is under control.
4. Level of credit losses should not as severe as the last recession. Diversified customer base and loan portfolio will perform better than others.
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