Fears of a looming recession and a tightening economy are pushing the country’s big banks to increase bad debt provisions, according to a report on Bloomberg.
Six of the biggest banks in the US - JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs (NYSE:GS), Wells Fargo and Morgan Stanley (NYSE:MS) - plan to set aside about $4.5 billion to protect against loan losses in their third-quarter earnings, the report said.
This reflects a belief that the unrelenting increases in the federal funds rate set by the Federal Reserve - now at 3.00% to 3.25% - will see consumers and businesses struggle to keep up with payments on loans, credit cards and other variable-rate debts.
By setting aside these massive reserves, banks are signalling they are anticipating having to handle more losses in the future as consumers continue to feel the squeeze of rising interest rates and soaring inflation.
Lenders are already starting to feel the effects of the Fed's fight on inflation, the report said.
Four of the biggest banks in the country are expected to report losses this week in their latest quarterly earnings reports, including JPMorgan Chase, Wells Fargo, Citigroup and Morgan Stanley (NYSE:MS).
Normally, a higher interest rate would be a good thing for banks - their earnings tend to rise with interest rates. But banks are seeing a dip amid the fluctuating markets - fewer deals are being made and investors are holding back as warning signs of a recession persist.
This is leading many banks to add to their loss reserves, the report said.
The amount banks add to their loan loss reserves then gets subtracted from their earnings and also results in adjustments to cash reserves.
Many lenders were forced to bolster their reserves to the tune of tens of billions during the crash in March 2020 when the coronavirus pandemic hit - but in the year that followed, as the economy recovered, they released them. Now they are having to reverse course.
In the second quarter of this year, JPMorgan reported significant losses and built up $428mln in bad loan reserves and that sentiment doesn’t seem to have changed for the bank.
Earlier this week, JPMorgan CEO Jamie Dimon warned on CNBC that “some kind of recession” will be coming in six to nine months.
WellsFargo also saw big losses in the second quarter of 2022, with early delinquencies - loans 30 to 89 days past due - increasing by $11.4 billion (25%) compared to the same period in 2021, according to the Federal Deposit Insurance Corporation, a federal banking regulator.
Which all suggests that as the Federal Reserve continues its fight against inflation, banks will see delinquencies persisting, as consumers and commercial clients have a harder time making payments in a tightened economy.