Concerns about the financial repercussions of the coronavirus crisis have largely faded since the first few hectic weeks. That’s a problem, because authorities should be doing much more to prepare for what could be a destabilising wave of losses.
In the face of the pandemic, the US Federal Reserve has done an excellent job of keeping financial markets functioning. It has pledged trillions of dollars to ensure that a broad range of institutions – including hedge funds, money-market mutual funds and securities dealers – can meet their immediate obligations. This has helped consumers and companies to borrow the money they need to stay afloat.
More than $1 trillion in mortgage debt – including an estimated $361bn on the balance sheets of private lenders – is in forbearance programmes.
At some point, though, the question will be not whether borrowers can keep borrowing, but whether they can afford the obligations they’ve taken on. Many in the US, for example, entered the crisis more indebted than ever.
As of March 31, non-financial corporate debt in the US stood at $10.5 trillion (Dh38.56tn), or 48.7 per cent of gross domestic product – the highest level on records going back to 1950. An unusually large share of that consists of bonds issued by companies with the lowest investment-grade ratings, or of so-called leveraged loans, to even riskier enterprises. Household debt stands at more than 75 per cent of GDP.
Much will depend on how soon the economy can return to normal. But as movement restrictions cause borrowers to fall behind on payments, potential losses are mounting. More than $1 trillion in mortgage debt – including an estimated $361bn on the balance sheets of private lenders – is in forbearance programmes. The share of car loans and credit cards in hardship stood at an estimated 7 per cent and 3.7 per cent in May, up about 18 and 180 times, respectively, from a year earlier. Defaults on the estimated $1.2tn in leveraged loans are up more than threefold.
When the reckoning comes, the crucial question will be where the losses are concentrated. The government will absorb some, given that it guarantees most mortgage loans and has put up $454bn to backstop the Fed’s emergency lending programmes. Beyond that, if losses accrue primarily to investors who can afford to take the hit, then the effect on the broader economy might be limited. If they end up on the balance sheets of systemically important financial institutions that lack the equity capital to absorb them, they could trigger distress that would worsen an already deep recession.
In the 2010 Dodd-Frank Act, Congress mandated regular stress tests to assess the largest banks’ exposures, tasked the Fed with ensuring that they built up enough capital to weather severe downturns, and adopted the Volcker Rule to curb speculative risk-taking. It also created the Financial Stability Oversight Council and the Office of Financial Research to monitor vulnerabilities outside the banking system and prod the relevant regulators to address any shortcomings.
Unfortunately, these regulators never made full use of their powers, and have more recently given up ground. The Trump administration slashed funding for the OFR and the FSOC, and scrapped efforts to subject systemically important non-bank institutions to added scrutiny. The Fed allowed – and is still allowing – the largest banks to deplete their capital by paying out money to shareholders. Stress tests merit little confidence. The latest round offered only a broad sense of banks’ vulnerability to the current crisis, with no information on individual institutions. Also, just this week, regulators completed a gutting of the Volcker Rule and further eased requirements aimed at maintaining banks’ resilience.
Preparing for the next crisis will require fixing some fundamental weaknesses. For one thing, the US should stop subsidising debt. Time and again, crises have demonstrated that excessive leverage makes economic shocks more damaging. Yet the government still encourages it – for example, by providing tax breaks for interest on mortgage loans and corporate borrowing, and by providing an almost unlimited backstop for the short-term debts of financial institutions. Eliminating or constraining such preferences would make the whole economy more resilient.
Officials must also address some more immediate vulnerabilities. The Fed should encourage banks to pause dividends and accumulate equity, and prepare for an emergency round of rigorous stress tests. The Treasury should reactivate the OFR and the FSOC to help ensure losses on leveraged loans don’t trigger more widespread contagion, insurers and large hedge funds don’t become weak links and mortgage markets keep functioning.
The 2008 financial crisis was particularly damaging in the way it undermined people’s faith in a political establishment that proved woefully unprepared. By taking responsible steps now, policymakers can ensure the coronavirus pandemic doesn’t bring about a repeat.
* Bloomberg
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Results:
Men's wheelchair 800m T34: 1. Walid Ktila (TUN) 1.44.79; 2. Mohammed Al Hammadi (UAE) 1.45.88; 3. Isaac Towers (GBR) 1.46.46.
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Abu Dhabi traffic facts
Drivers in Abu Dhabi spend 10 per cent longer in congested conditions than they would on a free-flowing road
The highest volume of traffic on the roads is found between 7am and 8am on a Sunday.
Travelling before 7am on a Sunday could save up to four hours per year on a 30-minute commute.
The day was the least congestion in Abu Dhabi in 2019 was Tuesday, August 13.
The highest levels of traffic were found on Sunday, November 10.
Drivers in Abu Dhabi lost 41 hours spent in traffic jams in rush hour during 2019
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Director: Jon M Chu
Starring: Ariana Grande, Cynthia Erivo, Jonathan Bailey, Jeff Goldblum, Michelle Yeoh, Ethan Slater
Rating: 4/5
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Price, base / as tested: Dh259,000
Engine: 6.4-litre V8
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Torque: 640Nm @ 4,300rpm
Transmission: Eight-speed automatic
Fuel consumption, combined: 7.7L / 100km
RACE RESULTS
1. Valtteri Bottas (FIN/Mercedes) 1hr 21min 48.527sec
2. Sebastian Vettel (GER/Ferrari) at 0.658sec
3. Daniel Ricciardo (AUS/Red Bull) 6.012
4. Lewis Hamilton (GBR/Mercedes) 7.430
5. Kimi Räikkönen (FIN/Ferrari) 20.370
6. Romain Grosjean (FRA/Haas) 1:13.160
7. Sergio Pérez (MEX/Force India) 1 lap
8. Esteban Ocon (FRA/Force India) 1 lap
9. Felipe Massa (BRA/Williams) 1 lap
10. Lance Stroll (CAN/Williams) 1 lap
11. Jolyon Palmer (GBR/Renault) 1 lap
12. Stoffel Vandoorne (BEL/McLaren) 1 lap
13. Nico Hülkenberg (GER/Renault) 1 lap
14. Pascal Wehrlein (GER/Sauber) 1 lap
15. Marcus Ericsson (SWE/Sauber) 2 laps
16. Daniil Kvyat (RUS/Toro Rosso) 3 laps
Director: Laxman Utekar
Cast: Vicky Kaushal, Akshaye Khanna, Diana Penty, Vineet Kumar Singh, Rashmika Mandanna
Rating: 1/5
Gully Boy
Director: Zoya Akhtar
Producer: Excel Entertainment & Tiger Baby
Cast: Ranveer Singh, Alia Bhatt, Kalki Koechlin, Siddhant Chaturvedi
Rating: 4/5 stars
The biog
Favourite food: Fish and seafood
Favourite hobby: Socialising with friends
Favourite quote: You only get out what you put in!
Favourite country to visit: Italy
Favourite film: Lock Stock and Two Smoking Barrels.
Family: We all have one!
COMPANY PROFILE
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At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
The biog
Most memorable achievement: Leading my first city-wide charity campaign in Toronto holds a special place in my heart. It was for Amnesty International’s Stop Violence Against Women program and showed me the power of how communities can come together in the smallest ways to have such wide impact.
Favourite film: Childhood favourite would be Disney’s Jungle Book and classic favourite Gone With The Wind.
Favourite book: To Kill A Mockingbird for a timeless story on justice and courage and Harry Potters for my love of all things magical.
Favourite quote: “We make a living by what we get, but we make a life by what we give.” — Winston Churchill
Favourite food: Dim sum
Favourite place to travel to: Anywhere with natural beauty, wildlife and awe-inspiring sunsets.
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Milestones on the road to union
1970
October 26: Bahrain withdraws from a proposal to create a federation of nine with the seven Trucial States and Qatar.
December: Ahmed Al Suwaidi visits New York to discuss potential UN membership.
1971
March 1: Alex Douglas Hume, Conservative foreign secretary confirms that Britain will leave the Gulf and “strongly supports” the creation of a Union of Arab Emirates.
July 12: Historic meeting at which Sheikh Zayed and Sheikh Rashid make a binding agreement to create what will become the UAE.
July 18: It is announced that the UAE will be formed from six emirates, with a proposed constitution signed. RAK is not yet part of the agreement.
August 6: The fifth anniversary of Sheikh Zayed becoming Ruler of Abu Dhabi, with official celebrations deferred until later in the year.
August 15: Bahrain becomes independent.
September 3: Qatar becomes independent.
November 23-25: Meeting with Sheikh Zayed and Sheikh Rashid and senior British officials to fix December 2 as date of creation of the UAE.
November 29: At 5.30pm Iranian forces seize the Greater and Lesser Tunbs by force.
November 30: Despite a power sharing agreement, Tehran takes full control of Abu Musa.
November 31: UK officials visit all six participating Emirates to formally end the Trucial States treaties
December 2: 11am, Dubai. New Supreme Council formally elects Sheikh Zayed as President. Treaty of Friendship signed with the UK. 11.30am. Flag raising ceremony at Union House and Al Manhal Palace in Abu Dhabi witnessed by Sheikh Khalifa, then Crown Prince of Abu Dhabi.
December 6: Arab League formally admits the UAE. The first British Ambassador presents his credentials to Sheikh Zayed.
December 9: UAE joins the United Nations.
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HOW TO WATCH
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6 UNDERGROUND
Director: Michael Bay
Stars: Ryan Reynolds, Adria Arjona, Dave Franco
2.5 / 5 stars
THREE
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Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
SHAITTAN
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Tamkeen's offering
- Option 1: 70% in year 1, 50% in year 2, 30% in year 3
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