For the first time since the 2008 financial crisis, the U.S. economy is facing a major threat due to outbreak of the coronavirus disease, which the World Health Organization called a pandemic on Wednesday. Severe disruptions in the travel and energy sectors, and in a range of service-based industries such as restaurants and retailers, are already taking shape. Policymakers in Washington are especially focused on alleviating potential credit issues for small and mid-sized businesses facing protracted disruptions, and in providing temporary financial relief to affected workers.
President Trump, in an evening address to the nation, struck an urgent tone about the coronavirus threat. “We are at a critical time in the fight against the virus,” he said, before announcing a suspension of travel with the European Union for non-residents. The severity of the move caused futures markets to continue a two-week plunge that has shed about 20% from major U.S. indices. Futures contracts on the Dow Jones Industrial Average and S&P 500 fell nearly 5% in late trading. From a high of 29,568 reached at the end of February, Dow futures traded as low as 23,344 on Wednesday night, according to Bloomberg data.
For many, the sudden and swift stock market drop, combined with an accelerating and hard to predict economic interruption will resemble the dark days of the 2008 financial crisis. Then, a bubble in the mortgage market cascaded outwards and put even the largest banks in America at risk of failure. Credit markets froze and a severe recession ensued, unemployment skyrocketed. However, in this economic threat, banks and financial authorities are in a position to mitigate the impact of the coming financial storm, instead of acting as an accelerant.
In contrast to the crisis, banks are well positioned to withstand any financial losses that may come from the coronavirus, putting them in a position to continue lending to consumers and businesses through what could become a recession.
We know this because the Federal Reserve now administers “stress tests” on the country’s largest lenders, which tests their capital position, loan quality and operational soundness against the kind of economic disruption some may fear coronavirus will become. Stress tests released by the Fed last June modeled the losses of America’s 18-biggest banks against a severe economic shock, which included a 10% unemployment rate, a 10% contraction in the economy, a 25% fall in home prices and a 50% drop in the stock market, among 28 total variables.