COVID-19

Banks set aside billions, expecting big consumer loan defaults

Nancy Marshall-Genzer Jul 15, 2020
Heard on: Marketplace
HTML EMBED:
COPY
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

What’s going on with extra COVID-19 unemployment benefits?

The latest: President Donald Trump signed an executive action directing $400 extra a week in unemployment benefits. But will that aid actually reach people? It’s still unclear. Trump directed federal agencies to send $300 dollars in weekly aid, taken from the federal disaster relief fund, and called on states to provide an additional $100. But states’ budgets are stretched thin as it is.

What’s the latest on evictions?

For millions of Americans, things are looking grim. Unemployment is high, and pandemic eviction moratoriums have expired in states across the country. And as many people already know, eviction is something that can haunt a person’s life for years. For instance, getting evicted can make it hard to rent again. And that can lead to spiraling poverty.

Which retailers are requiring that people wear masks when shopping? And how are they enforcing those rules?

Walmart, Target, Lowe’s, CVS, Home Depot, Costco — they all have policies that say shoppers are required to wear a mask. When an employee confronts a customer who refuses, the interaction can spin out of control, so many of these retailers are telling their workers to not enforce these mandates. But, just having them will actually get more people to wear masks.

You can find answers to more questions on unemployment benefits and COVID-19 here.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.