COVID-19

Banks set aside billions, expecting big consumer loan defaults

Nancy Marshall-Genzer Jul 15, 2020
Heard on: Marketplace
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A view of the "Fearless Girl" statue on Wall Street. Americans' indebtedness is affecting banks' balance sheets. Johannes Eisele/AFP via Getty Images
COVID-19

Banks set aside billions, expecting big consumer loan defaults

Nancy Marshall-Genzer Jul 15, 2020
A view of the "Fearless Girl" statue on Wall Street. Americans' indebtedness is affecting banks' balance sheets. Johannes Eisele/AFP via Getty Images
HTML EMBED:
COPY

This week’s parade of bank earnings continued Wednesday. We got second-quarter earnings reports from Goldman Sachs, PNC Financial Services Group and US Bancorp. PNC and US Bancorp do more consumer business than Goldman Sachs. And they both reported setting aside more money for loan losses. So why are banks so worried about whether consumers will pay them back?

At the end of the first quarter of this year, U.S. consumers were a record $14.3 trillion in debt.  

“There’s a lot of debt out there,” said Rita McGrath, a professor at Columbia Business School. She points out that $14 trillion in consumer debt was there before the pandemic hit.

“This is a kind of a time bomb that’s been coming for a long time,” she said.

Now, massive layoffs have left some consumers wondering how they’re going to pay their bills. Ian O’Neill lost his job as a technician on the New York set of the CBS series “FBI” in mid-March. They were two days away from wrapping up episode 19.

“And they decided not only were we not going to finish episode 19, we weren’t going to finish the remaining four episodes of the season. And that was it,” he said.

O’Neill is the breadwinner for his wife and two kids. They have a balance of about $20,000 on their Discover card. Plus a car lease payment, student loan and a mortgage. O’Neill said so far he’s been able to freeze all those payments. They’re getting by on his unemployment check. That includes an extra $600 a week, which runs out at the end of the month.

“When those programs start to run out, that’s when I get really panicked about what am I supposed to do?” O’Neill said.

His first priorities, he said, will be the mortgage, utilities and food. The credit card debt? That comes last. Banks know that. G. Scott Clemons, chief investment strategist at Brown Brothers Harriman, said three of the biggest consumer banks set aside billions in the second quarter to cover loans they might have to write off.

“But $30 billion of loan loss reserves for a single quarter tells you that they’re anticipating a lot worse to come,” Clemons said.

He added that crunch time could come as soon as this September, especially if unemployed people don’t find new jobs or get any more help from the federal government.

COVID-19 Economy FAQs

With a slow vaccine rollout so far, how has the government changed its approach?

On Tuesday, Jan. 12, Health and Human Services Secretary Alex Azar announced changes to how the federal government is distributing vaccine doses. The CDC has expanded coronavirus vaccine eligibility to everyone 65 and older, along with people with conditions that might raise their risks of complications from COVID-19. The new approach also looks to reward those states that are the most efficient by giving them more doses, but critics say that won’t address underlying problems some states are having with vaccine rollout.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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