Coronavirus fallout threatens financial stability

Abstract

▪ The coronavirus is set to sharply cut global growth and also risks sparking substantial levels of financial distress among both businesses and households, potentially cascading into the banking sector. The challenges this poses for policymakers is formidable. ▪ Financial vulnerabilities were evident in the corporate sector in many economies even before the virus struck, with rising debt, declining credit quality and worsening liquidity positions. Consumer‐facing sectors especially at risk from the impact of the virus tend to have weaker financial positions. ▪ There are also household fragilities. A large fraction of households ‐ often 40%–50% ‐ have limited liquid assets to tide them over if they cannot work. Access to sickness and unemployment benefits varies widely across economies. ▪ High levels of bad loans in some banking systems, most notably in Italy, could be exacerbated by the virus impact, threatening financial stability. High dollar debts in many economies outside the US are another risk factor. ▪ As well as containing the virus, policymakers need to consider imaginative approaches to prevent financial distress worsening the economic downturn, potentially including a need to rapidly backstop banks, firms, and households.