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From Lost Turnover to Nonperforming Loans: The Impact of the COVID-19 Pandemic on the Economy and on the Financial System

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Abstract

The COVID-19 pandemic created an unprecedented economic shock across the world. As a result of the coronavirus outbreak and the related health measures, nonfinancial corporations providing nonessential goods or services that cannot be consumed remotely have experienced a large decrease in their turnover. Using balance sheets and flows statements, we are able to quantify the impact of the pandemic on nonfinancial corporations and households, according to several scenarios for the pandemic over 2021. The impact is largely heterogeneous across sectors and amounts to up to 20% of the turnover for euro area nonfinancial corporations. Stress in these corporations and households can spill over to banks in the form of nonperforming loans (NPLs). The size and targeted nature of government support as well as the financial soundness (that is, net worth) with which economic agents entered the pandemic define the amount of NPLs that arise. Based on our estimates, the increase of NPLs seems limited, also when considering second-round effects from corporate insolvencies (about 5% to 7% of total loans). However, in certain cases, when banks are only slightly above the minimum prudential requirement of the leverage ratio, their solvency position may be threatened.

Suggested Citation

  • Sanchez Serrano, Antonio, 2022. "From Lost Turnover to Nonperforming Loans: The Impact of the COVID-19 Pandemic on the Economy and on the Financial System," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(3), pages 99-164, April.
    • Handle: RePEc:ysm:ypfsfc:v:4:y:2022:i:3:p:99-164
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    More about this item

    Keywords

    government support; net worth; nonperforming loans; pandemic;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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