COVID-19 Impact on the Banking Industry: Conditions in the Third Quarter of 2020 [December 23, 2020] [open pdf - 768KB]
From the Background: "The pandemic has caused businesses to close or limit operations and millions of job losses. Economic downturns threaten bank profitability because more borrowers might miss loan repayments, which can reduce bank income and impose losses. Meanwhile, bank liabilities--the deposits they hold and the debt they owe--obligate banks to make funds available to depositors and creditors. If borrower repayments decline enough, a bank's ability to meet its obligations could become impaired, potentially causing it to fail. In contrast, bank capital--largely equity stock and retained profits from earlier periods--enables a bank to absorb a certain amount of losses without failing. For this reason, bank regulators require banks hold certain amounts of capital (in addition to subjecting them to a variety of safety and soundness regulations) in order to avoid failures. However, if losses are sufficiently large, banks may nevertheless fail, reducing credit available to the economy and potentially destabilizing the financial system. Certain effects of, and bank responses to, economic downturns--such as reduced income and increased credit loss reserves--occur shortly after the onset of economic deterioration. Other effects--such as increased loan delinquency, incurred losses, and reduced capital value--occur after a longer lag (see CRS [Congressional Research Service] Insight IN11501, 'COVID-19 [coronavirus disease 2019] Impact on the Banking Industry: Lag Between Recession and Bank Distress'). Thus far the bank industry is holding up well, but as the pandemic continues to affect the economy, signs of stress may start to emerge."
CRS Insight, IN11562
Congressional Research Service: https://crsreports.congress.gov/