Yet even for Germany and France, risk costs would double compared to previous crises (Exhibit 1).Īnother stabilizing factor is the trend toward canceling dividend payouts in 2020, a move recently urged by many regulators globally, including the European Systemic Risk Board (the ECB’s risk-watchdog group) and the US Federal Reserve. In Europe, according to this same scenario, higher average risk costs are expected compared to previous crises, especially for Italy and Spain (though for Spain, not as high as in the 2011–12 sovereign debt crisis). In McKinsey’s executive survey on these scenarios, the scenario that has consistently attracted a high share of votes (A1) suggests hefty GDP contractions in 2020: –9 percent in the United States, –4.5 percent in China, and –11.5 percent in the eurozone. The McKinsey Global Institute and Oxford Economics have developed (and continually update) a set of economic scenarios to help analyze the contours of recovery. The Fed has estimated that pandemic-related loan losses for big US banks could reach $700 billion in a worst-case scenario (“double-dip” or W-shaped recession), pushing banks close to their capital minimums.Ĭlearly, the global economy faces a serious recession and a period of recovery that will vary by region and by sector. The US GDP contraction of –5 percent in Q1 exceeded analyst expectations the US Federal Reserve’s mid-range forecast is for a –6.5 percent contraction in 2020 overall. In the United States, the lockdown triggered massive unemployment. The economy is expected to recover slowly, with subdued consumer spending and business investment the ECB foresees a eurozone GDP contraction of –8.7 percent in 2020 overall. For the second quarter, when the lockdowns were in full effect, the european Central Bank (ECB) estimates that the eurozone GDP contraction will be –13 percent. The severity of the outbreak and the response varies by country, factors which will affect the size of the contractions. In the eurozone, GDP contracted by –3.6 percent in the first quarter of 2020. Forecasting institutions and scenario planners are estimating significant contractions in global GDP. The damage to businesses and economies is becoming more visible every day. New approaches are emerging quickly not only for underwriting and monitoring but also for customer assistance and loss mitigation (which will be the topic of a separate article). Leading banks are accelerating digital transformation to enable real-time monitoring and effective mining of transaction data, while automating the feeding of results into decision making. Data and analytics capabilities are proving essential to the solution. Early experience is revealing a path forward, as banks distinguish the varying impact the crisis is having on different sectors and subsectors of the economy, and direct more attention to the financials and business models of individual households and companies. With lockdowns now being lifted and businesses restarting, lending institutions are faced with a new and unfamiliar environment, in which they must evaluate and monitor credit risk with limited visibility and access to reliable data. There is much more epidemiological work to do, as the pandemic remains dangerously active.Ĭountermeasures taken to contain the virus and save lives stopped the economy from functioning. As of late July 2020, more than 14 million cases have been confirmed worldwide the virus has taken the lives of more than 600,000 people. It has forced regional and national economies to close for weeks and months at a time, causing hardship-sometimes of existential gravity-for many populations. The coronavirus pandemic is a humanitarian crisis that continues to affect lives and livelihoods around the world.
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