Blog

Lending in the Time of Covid-19

by Alvaro Cruz   May 18, 2020


Loans, or the act of giving capital to a borrower with an expectation of return, usually with additional interest, has been a component of finance in civilizations for a few millennia. From the ancient Chinese and Sumerians to the Greeks, societies modern and old alike were successful in incorporating regular lending into enterprising and thereby into local and regional economies. With globalization trends and the interconnectedness of businesses large and small on lending, understanding how Covid-19 is impacting current and future lending is crucial for industries that depend on the health of lending, such as financial technology. 

Historical Precedents 

It may be helpful to look at the last economic downturn to see how it affected lending. Though not necessarily a predictor of future events, looking at historical precedents can help in drafting policies and understanding how they can help or hinder economic recovery. Following the Great Recession of the late 2000s, the Consumer Financial Protection Bureau released a report examining data from 2004 to 2017 and noted some preliminary findings. Overall small business lending did increase after the recession, yet in 2017, the median county still had half the number of loans compared to 2004. An overall number of loans for small businesses from large and small banks decreased across the board before, during, and post-recession. The only exception was in credit unions offering more lending products to small businesses. A third and exciting finding was that during the recession, lending decreased uniformly. Yet, after the recession, recovery was varied, with states on the east coast and south recovering at faster rates compared to conditions in the great plains and western regions. Looking forward, it might be wise to consider this potential regional variation effect on recovery when assessing the economic recovery from Covid-19. 

Global Economy

Two economists, one a former minister of finance in Greece, discuss how they believe the impact of Covid-19 will reshape the global economy. Currently, several nations amongst the wealthiest in the world like the United States have embraced a policy of quantitative easing, the idea being a central bank buying government bonds or other financial assets, thereby injecting money into the economy to expand its activity. We’ve had policies enacted by Congress and the sitting president stateside, while in Europe, the European Central Bank plans to flux the financial conglomerate with cheap credit. Unlike the more independent US Federal Reserve, Bank of Japan, and Bank of England, the move by the ECB is facing push back from German courts. Responses to the crisis will vary across countries and regions. Both economists also note how the current crisis presents an inflection point or a fork in the road of the 21st century, one where we either restructure economic policies so that a greater majority of people benefit or one that further exacerbates income inequality and policies that hurt a majority of people worldwide.  

Current Lending Trends 

Currently, large players like General Motors are shedding light on lending and banking behavior at the national level. Even highly rated companies like GM are having to forgo previously set strategies as issuers are being advised to tighten liquidity. Other corporations like Heinz and Anheuser-Busch have removed their usually unfunded credit lines as a preemptive measure to the best affront the economic slowdown brought on by Covid-19. GM and other carmakers expect to close several plants in North America, and banks are concerned over potential revenue losses. It is not surprising that the Covid-19 crisis is not only impacting lending at the macro level but also the individual consumer. Mortgage lending has gotten stricter seemingly overnight, as lenders raise requirements on credit scores and other criteria. Lenders are unwilling to willingly lend to the same extent pre-crisis, which is unfortunate for consumers and small and large businesses alike. 

Immediate Outlook

Not unlike graduating college seniors during the Great Recession, Class of 2020 seniors faces an uncertain job market as the pandemic continues to not only freeze hiring across many industries but also indirectly contribute to the rescinding of internships and job offers. Much attention has been given to the skyrocketing unemployment claim. However, not all experts predict a drawn-out recession. Duke professor Campbell Harvey who has accurately predicted several of the last economic downturns, believes the current Covid-19 crisis will be over by the end of 2020. If indeed he is correct, the economy and his accurate prediction streak will thank him for it. 

 
Alvaro Cruz  Data Scientist
Alvaro is a data scientist at Plat.ai and has in the past also worked as a researcher and instructor. His current main interests in data science relate to classification, Bayesian methods, deep learning, and behavioral statistics. Having also a formal background in psychology, Alvaro believes there is added responsibility for data science professionals to ensure algorithmic fairness, reliability, and validity, especially concerning outcomes with ramifications for customers and other individuals. When not working he enjoys traveling, hiking, and consuming copious amounts of sour candy and TV, not necessarily in that order.