Credit Risk in a Pandemic

Abstract

Using different measures of how the Covid-19 pandemic progresses, the article confirms that the level of credit risk among US blue chip companies increases in tandem with the spread of the Covid-19 virus. The credit risk escalates dramatically during the pandemic but is still short of the levels seen during the 2008–09 Global Financial Crisis. In addition, the weekly ups and downs in credit risk and virus impact are significantly positively correlated throughout the pandemic. Furthermore, Basel II capital requirements rise drastically when the pandemic strikes but, again, not to the levels in evidence during the Global Financial Crisis.

TOPICS: Security analysis and valuation, derivatives, credit default swaps, credit risk management, financial crises and financial market history

Key Findings

• ▪ Two separate markets, the equity market and the credit (derivatives) market, are used to assess the level of credit risk. The level of credit risk among US blue chip companies increases in tandem with the spread of the Covid-19 virus.

• ▪ Using different measures of how the Covid-19 pandemic progresses, the weekly ups and downs in credit risk and virus impact are significantly positively correlated throughout the pandemic.

• ▪ The Basel II capital requirements increase significantly when the pandemic strikes but not to the levels seen during the 2008–09 Global Financial Crisis.