COVID-19

Banks set aside billions, expecting big consumer loan defaults

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

Millions of Americans are unemployed, but businesses say they are having trouble hiring. Why?

This economic crisis is unusual compared to traditional recessions, according to Daniel Zhao, senior economist with Glassdoor. “Many workers are still sitting out of the labor force because of health concerns or child care needs, and that makes it tough to find workers regardless of what you’re doing with wages or benefits,” Zhao said. “An extra dollar an hour isn’t going to make a cashier with preexisting conditions feel that it’s safe to return to work.” This can be seen in the restaurant industry: Some workers have quit or are reluctant to apply because of COVID-19 concerns, low pay, meager benefits and the stress that comes with a fast-paced, demanding job. Restaurants have been willing to offer signing bonuses and temporary wage increases. One McDonald’s is even paying people $50 just to interview.

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