Banks did not start the coronavirus recession and have so far participated in the rescue effort. But with the next round of federal relief uncertain, ordinary Americans are bracing for bigger financial problems on the horizon – and bankers face a moment of truth.
Despite months of job gains, the number of people receiving unemployment benefits is still close to double the peak of the Great Recession over a decade ago.
So far, government assistance has greatly eased the financial stress of millions of Americans. But federal relief programs such as postponed student loans and extended unemployment insurance have expired or will cease soon. Next spring, if federal relief is not extended, up to 20 million Americans will see their incomes drop to zero, according to the latestDepartment of Labor Weekly Jobs Report. And many of them will also see the cost of their housing increase dramatically as mortgage forbearance programs end.
The government will likely give another round of aid at some point. But the price will need to be high and the deployment swift to avoid severe stress in households already suffering from the recession. The brutal instrument of fiscal policy is unlikely to keep everyone afloat any longer. Even small income gaps can quickly lead to serious financial stress. Before the coronavirus recession, 37% of U.S. households did not have enough cash to cover a hypothetical expense of $ 400,according to a Federal Reserve 2019 study. And the pandemic, of course, has only underscored how dangerously so many Americans live near the insolvency line.
In short, millions more Americans could soon fall behind on mortgages, credit cards and auto payments. When that happens, the focus will be on the banks.
America’s mortgage lenders were largely responsible for the latest recession, and many senior executives ended up losing their jobs. This time around, banks were part of the solution – the public face of Paycheck Protection Program loans and other measures that have helped millions of Americans stay solvent. But when customers start to miss loan payments, bankers will be forced to take action that could reverse the script and turn them into bad guys again.
Alternatively, they can choose to be remembered as benevolent innovators. There are three ways that banks can both help their short-term customers and perform for their long-term shareholders.
First, they can seize this opportunity to put empathetic customer care and long-term relationship building ahead of short-term profits.
When borrowers start to miss payments, banks will have the legal right to try to get every dollar owed to them. But that could be reckless. Most banks have already set aside billions of dollars in reserves and are optimistic that they will not have to allocate more. If they garner too much zeal on delinquent loans, the public relations and cost of regulation could be high – at a time when the dollar value of attempting to collect many of these loans is at an all-time low. The calculation of being as forgiving as possible for borrowers who are truly faultless has never been so compelling.
Second, bankers have the opportunity to become more flexible. After the mortgage collapse of the 2000s, regulators imposed so many new rules and restrictions that banks decided it was best to normalize their operations to avoid any missteps. If they continue on this path in the months to come, they risk being seen as robotic and inefficient. Bankers have the opportunity to chart a new course towards personalized client care and advice, which would help strengthen relationships and avoid the perception that they are only looking after their own interests.
Third, they can become emergency lenders. The current deadlock in Congress is the third in the past two years to leave households facing a short-term cash flow crisis, even though federal government aid was almost certainly underway – the others being the government shutdown at the end of 2018 and the delay in deploying CARES ACT earlier this year. It seems unlikely that this will be the last of these occasions.
Banks can help solve this problem by providing short-term loans at reasonable interest rates to help people until federal help arrives. It would help short-term customers and solidify long-term relationships.
Whether or not the coronavirus recession turns out to be worse than the Great Recession, the number of stressed American households is set to increase sharply. Bankers will be under a microscope like never before when deciding how – or if – to help clients. If they are successful, they will build relationships for life. If they stumble, they risk harming not only their clients and shareholders, but also their own careers.
Aaron Fine is a partner at Oliver Wyman and responsible for the consulting firm’s retail and investment banking practice in the Americas. Ahmet Hacikura is a practice partner.
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