*The insights and recommendations shared in this article are based on the circumstances of March 19th 2020
The spread of COVID-19 is not only a health crisis – the effort to prevent its advance through social distancing is also threatening the survival of industries, scores of small businesses, and millions of jobs. To avert that as far as possible, banks’ immediate action must be to help customers withstand the shock. In our new blog series, we provide tips on how they should handle this. Part 1: What is already being done:
The COVID-19 pandemic has devastated the travel and leisure industry prompting airlines in the United States to seek a 50 billion US dollars coronavirus-aid package from the government. Hotels are seeking 150 billion dollars in aid. Meanwhile, small business owners including gyms, hair salons, and restaurants are tapping their personal savings and credit lines to meet payroll, and cash-strapped employees who live paycheck-to-paycheck are struggling to pay rent, bills, and utilities. The credit markets have already started to tighten for corporations, and companies that employ large numbers of employees are being encouraged to tap credit lines to raise cash and avoid layoffs.
As the crisis continues, banks must take unusual steps to help customers withstand the immediate impacts of the coronavirus shock. This is particularly the case for banks who are in strong financial footing and well-positioned to lean in to help customers. Banks are healthier at the start of this crisis than in previous ones like the 2008 financial market crash. Many banks have built up capital and liquidity in excess of regulatory minimums and buffers.
Keep small and midsized businesses afloat
As cities turn into veritable ghost towns, and people as well as small businesses suffer mightily, banks have a role to play to help them stay afloat. Several banks have already implemented plans to provide capital to small firms hit hard by the virus and social distancing measures. For example, WaFd (formerly Washington Federal Bank) have introduced credit lines for small businesses up to 200,000 US dollars interest free for 90 days. WaFd is also expediting interest-free loans of up to 30,000 dollars for businesses that have been in operation for at least two years and can show a 10 percent drop in revenues tied to the outbreak.
Grace in times of pressure
Many banks and credit card issuers are extending grace periods and waiving fees from skipped payments on loans such as mortgages, car loans, and credit cards. Goldman Sachs is allowing cardholders who ask for assistance to skip their March credit card bill, interest free. American Express and Capital One have similarly allowed people to skip payments on credit cards; and in the case of Capital One, this also includes auto-loans.
Lifting deposit and transfer limits
Banks may also want to increase phone deposit limits to keep folks from needing to come to the branch to deposit checks. In these times of crisis, some consumers are coming up against the U.S. Federal Reserve Board’s Reg D rule which limits the number of transfers and electronic payments from a savings or money market account to a maximum of six per month. Since consumers are not limited to the number of transfers when they make these transfers by mail or messenger, banks must make an effort to communicate these alternative options to customers.
Banks come under pressure as well
However, the COVID-19 crisis also puts pressure on banks. Risk of bad debts will rise at a time when banks are being required to write-off the total amount of loans in the current year that go bad or are predicted to be non-collectible. Demand deposits could be diminished as consumers and businesses burn through cash. Lines of credit are likely to get drawn down for cash reserves. Banks’ financial strength might also be challenged if low earnings put undue pressure on margins. In our next installment, we will address these issues and discuss steps towards preserving customer access to liquidity.