The coronavirus pandemic has become a global health crisis, affecting people in dozens of countries around the world. It's also had massive economic impacts, and many see the effects of the coronavirus lingering on for months or even years. With some of the biggest companies in the world having suspended their business operations and told their employees to stay home, the need for cash is greater than ever so that those businesses can pay their expenses without bringing in any revenue.
One way that companies put contingency plans in place to deal with crisis situations like this is to open revolving lines of credit. They might leave those credit lines untapped the vast majority of the time, but when they need the money, the credit lines are available to them.
Surprisingly, some of the financial institutions that offer these lines of credit -- which include the biggest banks in the world -- are reportedly pushing back somewhat on their clients drawing down their credit lines. That news might provoke fear that there actually could be systemic risk in the financial industry from coronavirus-related liquidity issues. However, as Bloomberg reports, the more likely reason involves big banks trying to make more money than they would from an ordinary credit line.
Big drawdowns amid the coronavirus crisis
Already, we've seen plenty of large corporations do massive drawdowns of existing loan facilities and credit lines that have been available for a while:
- Boeing made plans to pull out the full amount of a $13.8 billion loan to stockpile cash as it tries to deal with manufacturing shutdowns while waiting for word on the grounded 737 MAX aircraft.
- Automakers General Motors and Ford Motor have pulled out more than $15 billion each from lines of credit.
- Airlines like Delta Air Lines and Southwest Airlines have made multibillion-dollar drawdowns.
- Companies in a host of other industries have followed suit, including beer maker Anheuser-Busch InBev, cruise ship giant Carnival, and hotel company Marriott International.
The rush to raise liquidity makes sense for these borrowers, because their rates of burning cash are quite high and they've seen the biggest hits to revenue from the coronavirus pandemic.
Why do banks want their customers not to draw down their credit lines?
It might seem strange that big banks wouldn't want their customers to borrow on their lines of credit. Credit card companies seem to market their drawdown ability all the time to individual borrowers, urging them to take out cash in order to carry a balance and produce lucrative finance charge income for the issuing banks.
Yet unlike credit cards, the lines of credit that banks offer their biggest corporate customers aren't all that profitable. More often, they're part of a broader package of financing and services that banks give to their best clients.
To be clear, though, it's not that banks don't want their clients to borrow at all. Instead, what they prefer is for their customers to choose more profitable ways to get the liquidity they need. For instance, if a bank customer issues bonds -- preferably by using the bank's investment banking services -- then it can generate considerably larger fees for the financial institution while still giving the borrower the cash it wants.
Why would borrowers give in to big banks?
At first glance, what big banks want might not seem important. If big corporate borrowers arranged to have these lines available, they have the contractual right to move forward with drawing them down.
However, the relationship between big banks and their largest corporate clients isn't as one-sided as it is with ordinary individual borrowers. Corporations are important parts of what makes big banks profitable, but those borrowers also rely on their banking relationship for liquidity when they need it. Corporations are willing to cut banks some slack if it means the banks will get them out of a bind in the future. In other words, the long-term relationship matters, and both sides want it to remain strong.
At this point, banks seem to have plenty of capacity to lend, and they're just looking for ways to make the most from the financing they provide. If the coronavirus crisis lasts a long time, then that could change -- and suddenly, the reasons for big banks thinking twice about extending credit could shift toward more systemic concerns.