Strange new world of Covid economics upends loan-loss models

Models wrong-footed by government support, slumps in whole sectors and differences within industries

The last global economic crisis had its roots in banks’ overly optimistic view of the risk coming from many mortgage borrowers. This time round, banks’ predictions of credit losses are proving too pessimistic.

As the Covid-19 pandemic shut down economies around the world, the largest banks set aside $252.1 billion in loan provisions in the second quarter of 2020, but then revised that number down to $241.9 billion in the last quarter of the year (see table).

“The models are overpredicting,”

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