Many countries have already, or may soon, put in place crisis-response programs that provide government support for households, businesses, financial institutions, subnational governments and financial markets hit by the economic fallout from the coronavirus.
These measures collectively mitigate risks to financial institutions. Some elements of these programs, however, may increase risk to individual financial institutions over the long run, according to Moody’s.
In particular, government-mandated loan payment holidays could weaken asset quality, and regulatory forbearance on loss accounting rules and capital standards could increase risks for senior creditors by reducing the likelihood of early regulatory intervention.
After the crisis is over, most highly rated financial institutions are likely to return to profitability, restore their capital buffers, and continue to merit high ratings.
Therefore, the financial institutions that are more vulnerable to downgrades during the crisis are those that already have low ratings and are at risk of failing or operate in countries that lack the resources to fund broad economic support programs and are likely to experience deep, protracted recessions.