Can Banking sector hasten US economic recovery?

The US Bureau of Economic Analysis (BEA) published data (September 30th, 2020) that put a number to the economic devastation caused by the Covid pandemic. The real gross domestic product (GDP) decreased at an unprecedented annual rate of 31.4% in the second quarter of 2020. As expected, the shrinkage was bought about by decreases in key industry segments – accommodation and food services (-88.4%), healthcare and social assistance (-48.1%), durable goods (-43.3%). The Finance and Insurance sector, on the other hand, was in positive territory – contributing a growth of 11.9% nationally.

This perilous shrinking of the GDP may mean continued hardships over the foreseeable future. A second wave of the pandemic, like the one now raging in Europe, can only deteriorate and complicate the recovery process further. There may be no parallels in the history where survival, recovery and growth of the US economy and consequently, the global economy at large are tied solely to the invention of a vaccine for a pandemic.

Nevertheless, the data does have some silver linings. Unlike the recession of 2008, this time around, the financial services sector has displayed vigor, largely driven by mature consumer behavior. For example, many who are eligible for forbearance have instead chosen to pay down their balances.

The resilience of the banking industry in particular largely stems from three key factors.

Firstly, consumers have displayed a strong willingness and ability to meet their debt obligations despite severe health and economic hardships wrought by the pandemic. This trend to pay down the debt, it must be noted, was observed even before COVID, in Q1 of 2020.

The US Federal Reserve report (October 2020) shows that consumer debt dropped significantly in Q2 2020. US consumers have cut back on their revolving debt significantly.

Credit card balances have continued to fall during the last six months. In the month of August, total outstanding fell by US$ 7.2 billion. During the same period, however, auto and student loan rose by US$2.2 billion. The Overall, consumer debt in August, decreased at a seasonally adjusted annual rate of 2 percent.

Secondly, the federal stimulus payments have been a big help to consumers. They have used the money judiciously to buy essentials as well as pay down their debt. This behavior is significant since it has helped banks reduce their delinquencies and consequent charge offs and enable faster recovery in a post pandemic world. A second round of stimulus payments, as and when it comes, will only strengthen the consumer’s hands in meeting payment obligations.

Thirdly, banking consumers have switched channels in a big way. While the pandemic has reduced foot traffic to branches, it has boosted usage of digital (online/ mobile) channels. The uptick in traffic had even created outages at several leading banks. According to Fidelity National Information Services (FIS), there was a 200% jump in new mobile banking registrations in early April, while mobile banking traffic rose 85% (CNBC 5/27/2020).

This channel switch may be the biggest blessing for banks by not only keeping the industry afloat, but also may have actually ushered in a sustainable digital banking paradigm in a post Covid world.

All these have contributed to the strong performance of the Banking sector in Q2 despite the pandemic. Given the new dynamics, particularly the strong consumer payment behavior, it may be time for banks to reassess their tight lending policy. There may be a window of opportunity to get back to the business of lending to responsible customers.

If banks can jumpstart the lending process, albeit in a responsible manner, it may provide a beacon of hope for the overall recovery process. While it is too soon to predict a full recovery, the banking sector may be able and ready to catalyze a recovery America is eagerly waiting for.

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