Many bankers, financial analysts, and others have applauded our nation’s banks for resilience and financial strength during the pandemic-driven economic downturn. Banks, some argue, avoided the bailouts that other sectors in the economy needed.
Such applause is premature. The COVID-19 pandemic triggered an unprecedented financial crisis that required extraordinary government intervention. Yes, unlike in the Great Recession, banks did not receive billions of dollars of direct “bailouts.”
But banks benefited substantially from government support. In fact, our analysis shows that federal stimulus helped banks avoid as much as $300 billion in loan losses. Put another way, this indirect support from government programs allowed banks to avoid the worst of the economic shock in the first place.
Determining a precise estimate for the indirect support banks received from federal stimulus payments is difficult because so many factors are at play. So, in conjunction with updating our public-use Minneapolis stress test tool, we conducted a number of calculations, each done in a very different way to try to identify the amount of support banks received. They all point to the same general answer: Banks received hundreds of billions of dollars in support from government programs.
The fact that banks benefited from the fiscal response to COVID-19 is not bad. Indeed, it was the intended outcome, broadly speaking. The goal of the economic support was to bolster the economy—and banks taking large losses would have hurt, not helped, the recovery.
But ignoring the indirect benefit of the relief payments to bank health is, in our view, an important error of omission. The banks’ preferred narrative suggests that the inherent strength of banks, and that strength alone, explains their relatively good health coming out of a pandemic. In the worst case, these arguments could be used to advocate for weakening bank regulations that would put taxpayers at greater risk in future financial shocks.
Now is not the time to adopt a more relaxed approach to bank supervision and regulation. Instead, we should act as if banks would have lost billions of dollars, because it appears that absent extraordinary government support, they would have. We do agree with one part of the current narrative: Banks play an important role in our economic recovery, and it is in everyone’s interest to make sure the banking sector is resilient, with sufficient resources to absorb loses.
Ron Feldman is first vice president of the Federal Reserve Bank of Minneapolis and co-author of Too Big to Fail: The Hazards of Bank Bailouts. Jason Schmidt is a senior financial economist at the Minneapolis Fed.