Finance: Research, Policy and Anecdotes

Are banks catching Corona?

I have completed another , this time on the effect of the pandemic and lockdown policies on banks’ health, lending growth and loan pricing in the US.  Jointly with Jan Keil, we exploit geographic variation in the exposure of US banks to COVID-19 and lockdown policies using branch network and branch-level deposit data.  We find first that unemployment rates (the most accurate and most rapidly available indicator of economic activity) co-varies significantly across counties in the US in the first three quarters of 2020 with COVID outbreaks and lockdown policies. Second, focusing on banks, we find that  banks geographically more exposed to the pandemic and lockdown policies show (i) an increase in loan loss provisions and non-performing loans, (ii) an increase in lending to small businesses, but not in other lending categories, and (iii) an increase in interest spreads and decrease in loan maturities. These results are consistent with previous findings that show a general increase in lending after the onset of the crisis (related mostly to the drawdown of credit lines by large firms), while the bank-specific increase in small business lending might be explained with demand for government support programmes by small businesses in the areas most affected.  In a nutshell, these findings show that banks have already seen the negative impact of the pandemic and have reacted to higher lending risk with an adjustment in loan conditionality, but have also responded to higher loan demand and government support programmes.