(Bloomberg) For 93 uncomfortable minutes, Bank of America rushed to escape infamy this week, before it was saved by the grace of James Corden, the affable talk show host known for crooning in cars with stars.
The drama began when California Governor Gavin Newsom called out the bank for not offering 90-day grace periods to mortgage borrowers affected by the coronavirus, despite such pledges by rivals including JPMorgan Chase and Wells Fargo. A journalist tweeted the lashing, and then Corden reposted it to his 10.7 million followers. The bank raced to correct what it called the governor’s mistake.
Just over an hour later, the firm promised Corden it would defer payments on home loans for as long as the crisis requires. He relented, putting the internet’s fury to rest:
Across the nation, bankers are on edge. Publicly, they’re emphasizing that unlike the last downturn in 2008 they aren’t the cause of this collapse and they intend to help America get through it. Privately, they worry they’re destined to get cast as villains.
Once the government enacts its $2 trillion rescue package, banks are going to be the last resort for millions of consumers and businesses needing additional support to weather months of hardship. The nation’s eight banking titans have enough excess capital to ramp up lending by $1.6 trillion, but even that probably isn’t enough to meet everyone’s needs.
That means bankers will often decide which borrowers get relief from existing loans or access to more credit -- make-or-break moments for people and businesses trying to avoid default and insolvency.
One of the industry’s most senior leaders put it this way: The country’s banks are strong and ready to support the economy -- but they can’t afford to lend irresponsibly to clients who can’t repay. That limits the ability of banks to lend to others.
“The best credits are made in the worst of times,” said Julie Solar, a senior analyst who tracks North American financial institutions at Fitch Ratings. As the virus’s toll on the economy worsens, lenders will eventually be forced to pick winners and losers, she said. “Those borrowers who are higher investment grade are going to fare better.”
‘Fine Line’
There are also ethical questions: Banks must walk a “fine line” to prevent desperate clients from overburdening themselves with debts they can’t repay, Citigroup Chief Executive Officer Michael Corbat told the Financial Times this week. That’s “the last thing that we all want to see.”
Bank of America’s quick move to head off a Twitter backlash shows how worried banks are about keeping public criticism at bay. The lender followed up with a statement saying Newsom was mistaken and that it plans to defer payments on a monthly basis until the end of the crisis.
Banks have many other lending decisions ahead. It’s not hard to imagine people and employers facing rejection will feel they could’ve made it through if their bankers just gave them a chance. Such accusations have deep roots in American history, notably the Great Depression.
Desperation is rapidly mounting.
Companies hit first by the sudden halt to global travel -- such as airlines, hotels, cruise-ship operators, casinos and oil producers -- have been drawing down billions of dollars from existing credit lines for weeks. Their pain soon spread to restaurants, retailers and legions of small businesses as a growing number mayors and governors told residents to stay home.
On Thursday, the U.S. reported an unprecedented surge in the number of people seeking jobless benefits, with 3.28 million filing claims in just one week.
Behind the scenes, senior bankers said they are rapidly reevaluating their loan portfolios to gauge how the virus and social distancing measures are likely to affect corporate customers, trying to figure out which are most or least resilient.
Banks have been honoring credit lines they offered corporate clients in the halcyon years before the pandemic. One looming question is whether lenders might invoke the so-called MAC, or “materially adverse change” clauses, to stop drawdowns. One concern is that some businesses with little to no chance of making it through will siphon off billions in loans that could go toward supporting others.
Citing those clauses risks sending shock waves across the industry, potentially prompting stronger companies to draw down their lines preemptively. Still, one high-level banker said he’s expecting to see a few denials this year.
Banks are trying to maintain goodwill in Washington, working in close coordination with regulators on measures to shore up the financial system. Earlier this month, a delegation of CEOs from firms including Goldman Sachs Group Inc (NYSE:GS)., Wells Fargo, Citigroup and Bank of America visited the White House to offer reassurances that they can weather the turmoil and help others.
In the days since, national and regional lenders have rolled out a series of good deeds. They pledged more than $200 million to charities and relief efforts. Some offered branch workers extra pay. Several suspended long-planned layoffs to give workers certainty.
While the stimulus bill passed by the Senate this week includes clauses offering some borrowers forbearance, consumer advocates have been urging banks to go further on their own.
Lawmakers are ratcheting up pressure on lenders to help constituents in other ways. Last week, Senators Elizabeth Warren and Ed Markey pushed banks and credit unions in their home state of Massachusetts to suspend a variety of fees -- such as charges for late payments, overdrafts and using ATMS -- that generate billions of dollars in annual revenue nationally.
To conserve funds for lending, the country’s largest banks vowed to stop buying back their own shares through at least the middle of the year. The move comes at a cost for investors, some of whom would have preferred firms snap up shares at depressed prices, blunting this year’s 40% plunge in the KBW Bank Index.
“The biggest difference between now and 2008 is that the banks are a source of strength rather than the source of the problem,” said Tom Naratil, co-head of UBS Group AG’s wealth management unit. “This is the time for banks, obviously prudently, to make sure that we are extending credit to our clients.”
