Banking officials are in a panic over the coronavirus as it upturns their revenues, with PJT Partners restructuring specialist Tim Coleman describing the viral pandemic as “like a cross between September 11 and the global financial crisis of 2008.”
To mitigate the crisis, leaders are convening special meetings to address the swelling number of businesses that have drawn on backup credit lines and new accounting rules making loan losses worse.
With corporate bond markets slowed to almost a full stop, corporate customers have become antsy and resorted to tapping credit lines, unsure if they’ll be able to stay afloat if a full financial meltdown happens.
Companies also want to know about short-term financing “so that their boards can sleep at night,” one professional reportedly said.
Coleman said multiple entities had invoked material adverse change clauses, taking their credit lines before banks could pull them.
Banks have also been contending with new standards in the industry, introduced Jan. 1, 2020, which force faster recognition of loan losses. Marty Mosby, a banks analyst, said this was the primary issue at the root of both the virus and the oil problems. Under those standards, companies have to recognize likely future losses on a loan and set aside some funds to deal with them immediately. That's different from the old way, in which provisions were only booked when payments were missed.
A mass exodus of investors to banks in the U.S. and Europe has also contributed to the slump, as bankers feared that the virus would debilitate supply chains and spiral off into a number of lost jobs and hobbled industries.
Governmental and financial entities have responded with haste, pumping emergency funds into various institutions to keep things afloat. The ECB postponed its EU-wide “stress test” to next year, hoping that would give banks a lifeline to get back on their feet.