Similarities Between the 2008 Financial Crisis and the Coronavirus Pandemic
Posted by Stephanie Jordan on May 22, 2020
In our last blog post we discussed how the Coronavirus was different from our prior economic crisis by beginning as a health crisis, then causing a financial crisis as well. In this blog, I want to discuss a few distinct similarities between the 2008 Financial Crisis and the current Coronavirus Pandemic.
Over the last 20 years, we had 557 bank failures, but 489 of those bank failures, or 88 percent, took place over the five-year period from 2008 to 2013. Nearly all of those failures were community banks with under 10 billion in assets. Based on the graph below we can see that community banks were hit the hardest from the economic impact on the banking system.
By looking more broadly at the five-year period from 2008 to 2013 for banks and credit unions, you can see the overall consolidation and contraction that took place either due to failures, or mergers and acquisitions below.
Sources: FDIC, NCUA and Bloomberg LP
You will notice that we lost more than 1,600 banks, or 19.8 percent, and more than 1,000 credit unions, or 13.1 percent, with an overall decline of 2,600 financial institutions that were lost, or 16.5 percent in aggregate.
Now that we’ve reflected on the economic impact the 2008 crisis had on financial institutions, let’s review some of the high-level comparisons that we can draw from the 2008 crisis to the 2020 Coronavirus Pandemic.
First and foremost, we have very high unemployment, and a significant loss of not only consumer income and business income, but overall a loss of consumer and business confidence. As a result, financial institutions are getting pressure from regulators to reduce the burden on customers and to increase more loans. In many cases, higher risk loans include increasing the risk in the loan portfolio. Also, to combat the crisis and boost the economy the Fed is once again leveraging all its monetary policy tools, including lowering interest rates to zero. As a result, banks and credit unions are experiencing significant losses of interest income, which is also coupled with the losses in fee income due to a significant drop in consumer activity and consumer spending, and also due to the efforts to provide release to customers by either waiving or reducing fees through some of the guidance that was put out by the Fed, the FDIC and the NCUA.
As you can see, there are a lot of similarities between the 2008 and 2020 financial crisis. The good news is that banks and credit unions are well capitalized in general and are in much better shape than they were in 2008. However, that capital will only go so far, and so we believe that the banking community needs to start thinking about planning for profitability on the other side of the Coronavirus Pandemic.