WASHINGTON (Reuters) - U.S. banking regulators said in a joint statement on Monday they would not penalize banks that help borrowers struggling to repay loans due to the coronavirus outbreak, and vowed to provide “appropriate regulatory assistance” to affected institutions.
The statement from the Federal Reserve and others urged banks to work constructively with customers in affected areas, and urged institutions to continue to meet their financial needs. Prudent efforts to provide loan relief would not be criticized by bank examiners, they said.
“Regulators note that financial institutions should work constructively with borrowers and other customers in affected communities,” the agencies said.
The flexible tone from regulators is aimed at making sure banks feel comfortable to work out terms with borrowers temporarily hindered from paying back loans or facing other hardship due to the coronavirus impact.
Some analysts have begun warning that steps taken to curb the virus, such as cancelling public gatherings and reducing travel, could have economic consequences downstream, as missed paychecks and reduced earnings hit home.
Karen Petrou, managing partner of Federal Financial Analytics, said in a Friday note that ensuring lenders can accommodate strained borrowers will be necessary.
“Another week or so of growing COVID-19 contagion, canceled events, foregone travel, and shuttered businesses will lead to waves of delinquent debt from Americans with no other choice,” she wrote. “Households fearful of economic disaster will save themselves if they can. It’s thus up to policy-makers quickly to ensure that desperation doesn’t turn into disaster.”
In May, the Fed reported that while most Americans reported that they were OK financially, there were signs of underlying weakness. When faced with an unexpected $400 expense, the Fed found that 27% of Americans would have to borrow or sell something to cover the cost, and another 12% would not be able to afford it at all.
American households currently hold nearly $14 trillion in debt, a record, according to the New York Fed.
And there are similar lingering concerns about debtholders in the business world. The rising level of corporate debt, particularly to companies that are already heavy borrowers, has been a point of concern for policymakers for years.
In October, the International Monetary Fund warned that a global downturn half as severe as the one spurred by the 2007-2009 financial crisis would result in $19 trillion of corporate debt being considered “at risk”, which is debt from firms whose earnings would not cover the cost of their interest expenses.
Reporting by Pete Schroeder; Editing by Leslie Adler and Tom Brown