The coronavirus-related recession will lead to a marked increase in defaults on bank loans but, while that will hit earnings and justifies the sharp sell-off in banking stocks, the greatly improved financial health of banks means that we don’t believe this represents a systemic risk to the banking system. In particular, we think the risk of a GFC-style adverse feedback loop developing – in which mounting losses in the banking system trigger a further contraction in credit, additional asset price declines and, consequently, even greater loan losses – is quite low.
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