The pandemic has triggered massive economic disruption and unprecedented credit uncertainty. While banks have remained resilient and are helping to facilitate a robust recovery, it is clear that the full impacts of the crisis are as yet unknown. The scale of the impact will depend not only on the intensity and duration of the underlying public health crisis but also on continuing government stimulus measures.
While the immediate stresses banks faced at the onset of the pandemic were temporary, the changes underway in the industry will have repercussions for years to come. For now, central banks and policymakers continue to provide support, but it is clear that at some point this will end. Questions remain around whether otherwise viable companies will emerge with debt burdens that cause them to fail. Will the withdrawal of government support trigger corporate insolvencies and a wave of bankruptcies?
The increase in corporate debt poses significant risks. Banks need to be prepared for the possibility that insolvencies, bankruptcies and sector-specific scarring could materialise and cause credit losses. The research showed that banks are anticipating increased impairments in the year ahead. Yet, supervisors are concerned banks are not taking enough pain, they are too optimistic based on government support, and too reliant on backward looking metrics.