Banks Pretend 2020 Never Happened
Also pandemic risk factors, tail-risk hedges, holy rain, bond ETFs and circuit breakers.
From an economic perspective I think what we’d all like is to forget that 2020 ever happened. That is easier said than done—if we froze all payments then people wouldn’t have money to buy food, etc.—but there are a lot of gestures in that direction. For instance here’s a story about maintenance covenants in revolving credit agreements:
Basically if you enforce all your maintenance covenants when all your clients have stopped getting revenue, then you will put all your clients into default, and they won’t all pay you back, and you’ll have to recognize a lot of losses right now. If you instead say “ahh forget about 2020 it’s fine,” then you won’t have defaults, and you can sort of pretend that everything is fine, and maybe in 2021 their businesses will all come back and everything really will be fine, and anyway in the meantime you can charge them some extra fees. Makes sense.