WASHINGTON — The economic impact of the coronavirus pandemic will likely lead to an uptick in bank failures, but when and how many will depend on an array of factors.

The Labor Department on Thursday reported over 3 million jobless claims last week — the most ever — as businesses struggle with the effects of the virus outbreak. Analysts said over time it will be hard for some smaller banks already facing headwinds to stay open without being acquired.

However, absent some deposit run or other accelerating event forcing regulators to shut doors quickly, observers said it could take several months to get a clearer picture of the impact of the crisis on bank failures.

Higher loan losses would take time to eat through banks' strong post-2008 capital levels, and the duration of lockdowns and other measures to combat the spread of the virus is unknown. It is also unclear how effective the $2 trillion congressional stimulus package will be in containing the economic effects of the outbreak.

“If it’s a couple months from now and we still don’t see a light at the end of the tunnel, then this is going to have a big impact on many, many sectors — banks included," said Robert Bolton, a bank investor and president of Iron Bay Capital. "So, yes, that could mean failures.”

The industry and the Federal Deposit Insurance Corp. have enjoyed a mild period for bank closings a decade after the financial crisis forced hundreds of mostly community banks to be shuttered. Between 2008 and 2013, 489 institutions were closed — 157 in 2010 alone. But in the past seven years, 44 institutions have failed. Only five banks were closed in the past 27 months.

An immediate hit to banks' capital levels is unlikely, most analysts agreed. The pandemic is first and foremost a public health crisis. By contrast, the 2008-9 mortgage meltdown was more directly related to bank asset portfolios. Yet even in that crisis, the peak of failures handled by the FDIC came two years after the housing crash.

In any cycle, the extent of coming loan defaults is not immediately clear since it typically takes 60 to 90 days for loan delinquencies to turn into charge-offs and losses for banks.

'This isn't that type of financial crisis yet'

Still, industry observers said, it will be hard for banks to avoid a reverberating effect from a pandemic-induced recession.

“The focus can’t be on bank failures right now. This isn’t that type of financial crisis yet,” said Mike Krimminger, a partner at Cleary Gottlieb and a former general counsel at the FDIC. “Bank balance sheets leading into the pandemic were strong. You simply do not have anything approaching the level of bad assets as in 2008 — yet. But they’re going to go bad if businesses and consumers don’t have cash in the short term.”

Bolton said he has reached out to several bankers to ask how credit quality is holding up. He said most report that their loan books are solid for now, but many are not confident about making predictions for the remainder of the year because of uncertainty about the economic toll of the pandemic.

“It really does depend how deep this thing goes,” he said. “At the moment, this is not a financial crisis. It's a crisis of fear.”

The latest FDIC data shows banks had some of the highest levels of liquidity and capital ever at the end of 2019, leading regulators to direct financial institutions to dip into their buffers to help their customers affected by the pandemic. The rates of nonperforming assets and loan charge-offs were well below historic averages.

And the FDIC’s Deposit Insurance Fund stood at $110 billion at the end of 2019, the highest balance in history. The ratio of the fund's reserves to insured deposits was 1.41%, the highest since 1999.
But the threat to bank capital levels could depend on the concentration of loans in industries hit hard by efforts to contain the virus, such as airlines and hotels. Those sectors stand to get a financial shot in the arm from the $500 billion stabilization fund included in the stimulus plan passed in the Senate this week.

“The question for financial institutions is going to come down to their specific risk exposures and business model,” said Jim Wigand, a former senior FDIC official who helped oversee the resolutions of failed banks stemming from the 2008 financial crisis. “Some areas of lending will be hit harder by losses than others, and losses will depend on the length of the pause, which asset classes recover quickly after we come out of the pause and which ones don’t.”

Wigand said clarity about the effects of the crisis on loan performance might not arrive until after the summer.

"Six months from now, there will be institutions where it becomes clear that some of its loans aren’t performing, and that will receive a more critical look from the regulators," he said. “That’s when you’ll see the impact of loan impairment roll through a bank’s financial statements.”

A senior FDIC official, who spoke on the condition of anonymity, agreed that it is "hard to see the future here, because you don't know how banks are going to react.”

“But I don't think this is something that happens right away. It is going to take some time to play out,” the official said.

Banks' pre-virus stress, depositor anxiety increase failure risk

Still, many said that for banks already experiencing financial stress heading into 2020, the virus fallout will amplify pressures.

Some analysts suggested that bank failures could rise sharply because of how fast the virus outbreak has taken an economic toll, with businesses closing and unemployment spiking within just a few weeks.

“I’m 78 years old; I’ve been through a lot of crises,” said Bert Ely, principal at Ely & Co. “This is unlike anything we’ve seen before.”

“In some ways, this could be worse than the Great Depression,” Ely said, adding that the effects of unemployment today are much starker than during the 1920s and '30s because people rely more on debt. “Back then, most people did not have mortgages. ... And the Depression was drawn out over years."

Meanwhile, the anxiety of depositors tempted to pull their money because of pandemic fears could intensify risks to banks regardless of how well their loans are performing.

In recent days, some bank trade associations have urged their members to remind customers about the safety of FDIC-insured bank accounts.

“There is no need for bank customers to hoard cash or withdraw large sums of cash," the North Carolina Bankers Association said in a recent statement. "It’s unnecessary and creates a safety concern for both the customer and the banker.”

Federal policymakers apparently have already recognized the risk of heightened withdrawals.

In a video posted to Twitter on Tuesday, FDIC Chairman Jelena McWilliams addressed depositors, saying that “at a time or in a pandemic like this, it is way too easy to get confused and to have fear about what you should be doing with your money in your account.”

“The last thing you should be doing is pulling your money out of the banks now, thinking that it's going to be safer someplace else,” McWilliams said. “You don't want to be walking around with large wads of cash, and you certainly don't want to be hoarding cash in your mattress.”

The stimulus package passed by the Senate on Wednesday authorizes the FDIC to restart a program providing unlimited deposit insurance for non-interest-bearing transaction accounts that exceed the normal FDIC limit.

The threat of an extended crisis

But should the pandemic stretch on for several months, even healthy banks could struggle alongside cash-strapped clients, said Danny Payne, a bank consultant and former commissioner of the Texas Department of Savings and Mortgage Lending.

"If this is an extended problem, then the picture becomes much more critical,” Payne said. “I wouldn’t be surprised if there weren’t another extensive bank bailout if we’re in for the long haul.”

Krimminger of Cleary Gottlieb said that, while there is "not an immediate risk to banks,” if the economic toll of the coronavirus leads to higher unemployment and more bankruptcies, "the ability to remain current on loans and other credit is going to be a question mark."

Others said even if the coronavirus scare lifts in coming months and the specter of failures recedes, consolidation among community banks is likely to accelerate.

Charles Wendel, president of Financial Institutions Consulting, said the near-term economic pain from the virus combined with the effects of the Federal Reserve's zero percent interest rates on net interest margins will motivate sellers.

“If their earnings power is depleted, I think a lot of them will come out of this and say, ‘No mas,’ ” Wendel said.

Ken McCarthy contributed to this article.