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1 1 (September 10, 2020)

handle is hein.crs/govdbsc0001 and id is 1 raw text is: Researh Sevice COVID-19 Impact on the Banking Industry: Lag Between Recession and Bank Distress September 10, 2020 Economic recessions and financial crises can cause distress in the banking industry. Typically, there is a lag between the onset of a recession and the peak of bank industry distress. The economic effects of the Coronavirus Disease 2019 (COVID-19) pandemic could similarly stress the banking industry, perhaps acutely, given the sudden and unprecedented nature of the economic contraction. Even though this contraction is severe, a lag is expected, and certain provisions in the Coronavirus Aid, Relief, and Economic Recovery Act (CARES Act; P.L. 116-136) may lengthen it. Typical Lags When people lose jobs or businesses revenue declines, many individuals and businesses have resources to continue making loan payments for a time. For example, U.S. households and nonprofit organizations held almost $11.4 trillion in cash and bank accounts and another $2.6 trillion in money market mutual funds (an instrument similar to a bank account) at the end of 2019. U.S. nonfinancial businesses held almost $3.5 trillion in cash and bank accounts and $808 billion in money market mutual funds. In addition, individuals who lose jobs are often eligible for unemployment benefits. Reducing expenses and drawing on lines of credit (e.g., credit cards) to meet those expenses are other strategies that could allow borrowers to continue to make installment loan (e.g., mortgage) payments. These resources can last for a time, but missed loan payments begin to grow at some point. Even then, banks have some time before they become distressed as a consequence. If a borrower were to miss a few payments, it would not necessarily mean the loan is a total loss. The borrower might find a new job, or business might start to pick back up. For this reason, a loan goes through a progression of statuses in bank records-30-89 days late, 90+ days late, nonaccrual-before the bank writes it off as a loss (called a charge-oJj. The bank tries to recover what value it can, such as through a foreclosure and sale of a property securing a mortgage. The net charge-off is the amount that is ultimately unrecoverable. Once losses start to accumulate, a bank may deplete its capital to a point that it is seriously impaired and in danger of failing. Bank capital can be considered the owner's investment in a bank, which includes the investment by the stockholders of bank stock, and an instrument that enables a bank to absorb losses on assets. As shown in Figure 1, in the last three recessions, the two-year cumulative net charge-off rate does not peak until one to three years after the onset of a recession. Congressional Research Service https://crsreports.congress.gov IN11501 CRS NStGHT Prepaimed for Mernbei-s and Committees 4 o. C- --q .. . . . . . . . ...-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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