A Few Effects of COVID-19 on Banks

December 14, 2020
Antonio Flores

 Over the past year, the economic landscape has been greatly changed, as the coronavirus lockdowns have devastated businesses across the world. Many small businesses in particular have closed, and in-person businesses have had trouble making money as customers have not been allowed in their stores. Millions of people have had trouble making rent or mortgage payments; college students have had to stay with their parents. Many mortgage lenders, accordingly, have not been able to receive payments from their debtors. Because of this, governments around the world have been forced to give aid to banks and lenders.

In the EU alone, there are currently 1.7 trillion dollars in loan payments not been made due to the COVID-19 pandemic and the government response. Many of the government responses included payment moratoriums on loans such as mortgages as well as business loans which guaranteed relief for up to 25% of outstanding loans. The problem is that many people have not regained their jobs or their money, and so when the moratorium is over there is a massive wave of bad loans that will hit the banks. The last time a wave of bad debt hit the banks on a similar scale was the 2008 recession. It remains to be seen what will be done to prevent this, but considering that the EU has already printed 750 billion euro to fight the current crisis, they will likely print more. 

Despite this increase in the number of bad mortgages, in the US, mortgage debt has skyrocketed due to the increase in the number of new mortgages. One effect of the riots that took place in many American cities is that wealthy city dwellers are moving to suburbs, which results in more mortgages as people who formerly rented buy houses in new areas. These mortgages will perhaps have lower risk, as the ones who take them out tend to be able to work remotely.

To conclude, the banks of the world have been forced to take drastic measures to deal with the amount of bad debt that has been flooding in. It is a major part of the next phase of the recovery from the current economic crash: the banks control a large part of the money supply, so they will have to deal with their own problems caused further up the chain of lending. The US and European governments will likely continue with printing money and quantitative easing in order to deal with the problems.




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