Will the Coronavirus Lead to a Financial Crisis?

Dear Reader,

Up till now, banks have been relatively immune to the coronavirus disease COVID-19 shutdown woes.

I say relatively, because stocks of global banks have fallen a lot since February and they are still much lower than their recent highs.

Will the coronavirus lead to a financial crisis? It depends how long the COVID-19 economic crisis lasts. If the recession goes on for 2-3 years there may well be a failure of a large systematic bank. Sooner or later, if the current economic crisis continues the number of bankruptcies will rise and banks will record large losses on their loan portfolios.

Since the Great Recession in 2009 regulators pushed esoteric financial instruments and basically risks out of banks and into the shadow banking sector. Banks were left with making plain vanilla loans and trading. The problem with this strategy, however, is that if the economy suffers a massive and encompassing collapse like now, many plain vanilla loans will go sour at the same time. Italian banks experienced something similar after 2013. Italian banks did not participate in the mortgage backed securities boom before 2009. However, when the Italian economy suffered several recessions after 2010 banks started recording credit losses and Italy's financial system was in danger.

If the coronavirus slump goes on for 3 years, let us say, I have no doubt that the health of global banks could prove vulnerable. What does this mean for stock markets? Stock markets could experience a WW, two Ws, shaped pattern bouncing up and down along a lower bottom.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn, Facebook etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed on the blog are Petar Posledovich's. Petar Posledovich does not guarantee the accuracy of the information presented on this blog and social networks. The information presented is "as is".

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich