The novel coronavirus really gave us quite a setback. A lot of people lost their jobs. We’ve seen businesses regardless of their scale and industry, close their doors. We really are looking at a recession that’s happening right now.
There are two industries that were particularly hit pretty hard, though. First is travel, and second is the financial sector. It’s not a big surprise. Just take a look at how many people were not able to repay their personal loans when the lockdowns were enforced.
Thankfully, this is not the case for everyone. We definitely saw a trend of people looking at how to start a business, particularly those that can be run at home. However, we’re still counting it as an effect of economic volatility if we’re going to be completely honest.
In this article, we seek to look into the impact of this global crisis on financial services, and on the credit market in particular.
We’re seeing short-term effects on the number of participants in the credit market, especially during the first few months of the health crisis. This is due to the risk aversion practices that most investors got into by default. No one has ever experienced a pandemic of this scale for over a century, after all. The last major global pandemic happened 102 years ago, during the Great Influenza of 1918.
As mentioned, though, these effects were seen as short-term since the market eventually picked up again as the participants got more used to the crisis, and as more people recognized the pandemic as an opportunity to purchase more financial products given the record low rates.
As mentioned, we have seen a surge in demand after the initial shock of the crisis. Unfortunately, financial institutions weren't able to prepare for the increased trading volume that opened up issues on the demand for them, which elevated the costs significantly, especially for dealer-intermediated financial products like corporate bonds and short-term funding.
While we’re not saying that the same can be said across all banks, they do tend to have more security since they are more well-capitalized and have more ways to cover the demands and weather through the storm.
The real victims of the industry are those that belong to the nonbank sector. A good example is the mortgage industry. The more the unemployment levels rise, so do mortgage delinquencies. And while they surely cannot blame their clients, they do end up bearing the burden of managing their operations and being able to continue paying back their investors even amidst the lack of revenue coming in.
Projections state that we might be seeing these trends extend up to 2024 given the current data (and the rate that the pandemic is going).
Fortunately, it’s not always bad news. For instance, the United States government has enforced the Coronavirus Aid, Relief, and Economic Security (or CARES) Act to provide financial assistance to those who are worst hit by the pandemic. This initiative is not for individuals alone but also extends to business owners regardless of the industry that they belong in.
Are you part of the financial sector and wondering what you can do during these trying times? Here are some tips that you can keep in mind, in the meantime:
Here’s the deal: no one really expected the novel coronavirus to blow up the way it did when it was first discovered. Certainly not the financial sector and the participant of the credit market.
There were immediate effects when the anxiety was at its peak, but as we have proven time and time again, humans are certainly capable of adapting and even “getting used” to a crisis. This then showed an inverse trend with a surge of demand for financial products.
Honestly, only time will tell how this pandemic will progress and what its after-effects are as we draw nearer to seeing a post-pandemic world. Just remember that as with any storm, this too shall pass.
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