Around the world, economies have stalled as people have practiced social distancing to slow the spread of the COVID-19 virus and save lives. At the same time, while people can disengage from certain activities, companies cannot halt their financial obligations. Every day, companies need to make good on financial obligations to workers, creditors, suppliers, and customers. In addition, some companies need to keep operating to provide critical services to the economy as we manage through the pandemic. Access to credit for businesses is critical during the pandemic. Businesses that can obtain credit and remain viable during this unprecedented period will be able to ramp-up production, retain and re-hire workers, and support the economy now and in the future. Companies that are unable to maintain access to credit may be unable to support the economy once we turn the corner. In this post, we review how large banks have recently extended credit to help businesses of all kinds remain viable now so that they will be ready to serve the economy in the recovery.
Forum Member Business Lending in Q1 2020
As shown in Figure 1 below, during the first quarter of 2020, Financial Services Forum members increased their lending to businesses by roughly $272 billion, which amounts to a more than 15 percent increase in business lending over the quarter. This increase in business lending (orange dot) is unprecedented. According to data from the Federal Reserve, since 1996, business lending of the top 25 commercial banks in the United States (blue dots) grew, on average, by roughly one percent per quarter. Over the entire 1996-2019 period, the largest one-quarter increase in business lending was 5.3 percent (which occurred in Q4 of 1999). Put in these terms, the $272 billion increase in Forum member business lending in the first quarter of 2020 stands out as being nearly three times higher than any quarterly increase in business lending among the nation’s top 25 commercial banks since 1996.
While the $272 billion increase in business lending is noteworthy, it is important to think in terms of real-world examples of how Forum members are supporting businesses of all sizes in these challenging times. Table 1 provides three specific examples of large companies that have gained access to credit from Forum members during the first quarter of 2020. The amounts cited reflect the entire amount of the credit agreement entered in the first quarter by these companies, which includes credit provided by Forum members and other lenders as well.
Table 1: Select New Business Lending: Q1 2020
|Company||Loan Amount ($BN)|
Source: SEC 8-k filings
It is useful to reflect just a bit on each of these companies and how they fit into the current economic situation. American Airlines has been ravaged by travel bans and the general cessation in discretionary travel during the pandemic. Loans to airlines like American are critical to ensuring that our transportation infrastructure will remain viable through and after the pandemic. General Motors, apart from feeling the effects of declining auto demand, is on the front lines of the pandemic as it retools its factories to make ventilators. The adjustments and upgrades to their factories will require an investment that can be funded with new credit. Finally, Walgreens is remaining open to provide pharmaceuticals and other daily necessities to people who need them. Walgreens also is providing COVID testing in Arizona, Illinois, Michigan, Texas, and Louisiana.
In addition, Forum members have been an important source of lending to small businesses, making loans to companies who employ millions of Americans across the country.
J.B. Tile & Stone received a nearly $500,000 loan from JPMorgan Chase. Connie Brown, CFO of the Redwood City, Calif., company told the San Francisco Chronicle that the loan will allow it to keep paying all 37 of the family-owned company’s employees, despite having to shut down operations in March.
“For us this is seriously a lifeline,” she told the newspaper. “I don’t know how we would have survived without it.”
Credit is the lifeblood of our economy and that is perhaps truer now than it has ever been. During this period of voluntary inaction, businesses everywhere need bridge financing to get through the pandemic. Financial Services Forum members are committed to channeling credit to businesses during these unprecedented and challenging times. The historic $272 billion in new business lending during the first quarter of 2020 is an important part of the solution that will help the entire country get ahead of the virus and bring the economy back online.