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Financial Fragility Following COVID-19 Income Shocks: Who is Most Vulnerable?


Ray Boshara , Lowell R. Ricketts
Monday, June 29, 2020

Note: An extended version of this article was first published as an In the Balance research brief, Which Families Are Most Vulnerable to an Income Shock such as COVID-19?

In early March, when it was clear that the COVID-19 pandemic was not just a health crisis, but also an economic one, we wondered: Which families should we be most concerned about?

Millions of Americans were about to lose their jobs and incomes, an issue which policymakers were beginning to address, but we knew that families with weak balance sheets—too much debt and not enough savings, home equity or other assets to fall back on—would likely suffer even more.

But which families, exactly? To answer that question, we decided to look at a meaningful barometer of financial fragility: serious delinquencies, defined as being at least two months behind on a current loan obligation.

Based on the table below, the answers are grouped into two categories—those who are more and those who are less likely to fall behind on their debt payments.

Who Is More Likely To Fall Behind?

Liquid Assets and Debt Burden Have Biggest Effect on Likelihood of Serious Delinquency

Bankruptcy rate change variances according to household finances

SOURCES: Federal Reserve Board’s Survey of Consumer Finances and Center for Household Financial Stability calculations.
NOTES: The bar chart shows the percent change in the likelihood of serious delinquency. Each bar compares two groups. For example, in the sixth bar from top, we see that, on average, Black families were 28.5% more likely to be seriously delinquent than white families, after controlling for the other variables shown here.

They don’t have enough “safe” assets. By far, the most important predictor of serious delinquency is whether a family has at least two months’ worth of income in the form of “safe” or liquid assets, such as cash and checking and savings accounts. If they don’t, they are about 300% more likely to be seriously delinquent than those who have at least that buffer (or more).

They have too much debt relative to their income. The next most important factor associated with serious delinquency is whether a family’s debt obligations exceed 40% of their income. If the family’s debts are over that threshold, they are about 200% more likely than those who aren’t as leveraged to be seriously delinquent.

They lack good health. Families reporting “fair” or “poor” health were nearly 60% more likely than those reporting “good” or “excellent” health to report a serious delinquency. This highlights how health problems, such as COVID-19, can lead to financial instability.

They are supporting family or friends. Families providing financial support to relatives or friends were 41% more likely to fall at least two months behind. In addition, each child in the family increased the likelihood of a serious delinquency by 17%.

They own vehicles. Those who own vehicles are 35% more likely than those who don’t to report serious delinquency. It’s possible that a vehicle loan itself is a source of delinquency.

Who Is Less Likely To Fall Behind?

Now let’s look at some factors associated with families being less likely than others to report a serious delinquency, again holding all other factors constant.

They have other sources of wealth. Notably, families that have home equity, retirement accounts and equities (such as stocks) are 44%, 25% and 21% less likely, respectively, to report a serious delinquency than families without those assets. We speculate that these generally appreciating assets serve as buffers. They can be converted to more liquid assets, if necessary.

They have attained higher levels of education. In general, the more education families have attained, the less likely they are to experience serious delinquency. Compared to those with high school diplomas, those with a post-graduate degree were 31% less likely to report a serious delinquency, and those with a four-year college degree were nearly 19% less likely to report having one.

They are older. Older Americans (those aged 62 and above) are 61% less likely than middle-aged Americans (those aged 40 to 61) to experience serious delinquency. Younger Americans (aged 39 or younger) had roughly the same rates of serious delinquency as those who are middle-aged; this is consistent with findings from the second essay of the 2018 Demographics of Wealth series that suggests middle-aged and younger Americans typically have more financial obligations and less wealth than older Americans.

Race and Ethnicity Matter, too, though It’s More Complicated

Findings regarding race and ethnicity were complex:

Hispanics are less at risk of serious delinquency. Compared to whites, Hispanics are 28% less likely to experience a serious delinquency once we account for the factors above (e.g., safe assets, debt-to-income ratios, education, etc.) that otherwise place families at a greater or lesser risk of falling at least two months behind on a debt payment.

Black families remain at a greater risk of serious delinquency. Black families are still 29% more likely to report a serious delinquency than whites—even after accounting for the characteristics above that otherwise make families more or less likely to fall behind. While it is hard to fully explain this, we believe that this remaining disparity—unique to Black families—partly reflects cumulative and systemic factors, such as the legacy of slavery and decades of housing discrimination, as identified in previous research by the Center for Financial Stability.

How Can Economic Resilience Be Promoted?

We encourage policymakers and others to promote economic resilience not only through cash payments and other liquidity measures, but also by helping families build or rebuild their wealth.

Efforts should be especially targeted among less-educated, younger and Black and Hispanic Americans who consistently have lower levels of wealth (as noted in a recent On the Economy blog). Doing so would not only help build wealth buffers, but also expand opportunity and upward economic mobility.

Ray Boshara 

Ray Boshara is a senior adviser and the director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. He is also a senior fellow in the Financial Security Program at the Aspen Institute. Read more about Ray's publications.

Lowell R. Ricketts 

Lowell R. Ricketts is the lead analyst for the St. Louis Fed's Center for Household Financial Stability. His research has covered topics including the racial wealth divide, growth in consumer debt, and the uneven financial returns on college educations. Read more about Lowell’s research.