NEW YORK – Tarred as villains during the 2008 financial meltdown, banks of all sizes are trying to help Americans reeling from the economic crisis caused by the coronavirus outbreak.
Banks are scrambling to put into place loan forgiveness and relief programs, working to keep customers from panicking or falling into financial ruin. They have a vested interest in preventing millions of people and businesses from defaulting on hundreds of billions of loans at once, something that would do significant damage to the banks' own finances.
The potential for millions of their customers to default on credit cards, small business loans and mortgages means banks have to do something to protect borrowers, many of whom went from having a job or a business to nothing, sometimes in a matter of days.
Husband and wife team Shari and Larry Kaynen were forced last week to close their chain of six high-end clothing stores called Shari's Place, based in Greenvale, New York. They are now working with their bank to rework their long-term debt into new terms with lower interest rates that will help their cash flow.
“This could mean a lot of ruin to a lot of small business,” Shari Kaynen said. “I am not corporate America. I have millions of dollars worth of merchandise, but I still have to pay my landlord rent.”
The extent of aid each bank is offering varies, however. Some are just allowing customers to defer payments, meaning interest is still accumulating while in these programs. Others have instituted forbearance programs, where there will be no penalty for a customer who wants to hold off paying debts for 30 or 60 days.
Banks are putting these programs in place partly because they would be facing a massive number of defaults and bad loans on their books without them – causing billions of dollars worth of paper losses to the banking sector.
Further, the credit reporting companies like Experian and Equifax would be swamped with negative credit reporting data, which would destroy the credit scores of millions of Americans who were paying their bills on time but suddenly find themselves out of a job. That would make giving loans in the future to these impacted borrowers more difficult.
Lastly there's the politics.
The Great Recession was caused by careless banks making too many bad loans, which ultimately required U.S. taxpayers to backstop or bail them out. The bailouts of 2008 and 2009 have not been forgotten by the industry.