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More optimistic about the recovery, big banks trim the reserves they set aside to cover bad loans

Justin Ho Oct 14, 2020
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Big banks, like JPMorgan Chase, are feeling more confident about the economic recovery after solid third quarter earnings. Spencer Platt/Getty Images
COVID-19

More optimistic about the recovery, big banks trim the reserves they set aside to cover bad loans

Justin Ho Oct 14, 2020
Heard on:
Big banks, like JPMorgan Chase, are feeling more confident about the economic recovery after solid third quarter earnings. Spencer Platt/Getty Images
HTML EMBED:
COPY

The country’s big banks have been reporting quarterly earnings this week, and things have been looking up. Bank of America’s profits beat analysts’ expectations. Profits at Goldman Sachs and JPMorgan Chase are higher now than they were a year ago, before the pandemic.

Another sign of confidence? Those banks say they’re reducing the amount of cash they set aside to cover loans that go bad.

It was only three months ago, in July, that banks were setting aside extra cash to cover bad loans. But Gerard Cassidy, managing director at RBC Capital Markets, said since then, banks have watched the economy slowly improve.

“That has brought out the banks to recognize that they overcompensated for a more severe downturn,” he said.

Big banks aren’t all that exposed to businesses that have struggled during the pandemic, such as restaurants, small retailers and other small businesses, said Nate Tobik, founder of CompleteBankData.

“They are more exposed to some of the bigger businesses, which have backstops to their credit,” he said.

In other words, big businesses can issue bonds, and mid-sized businesses can access the Federal Reserve’s Main Street Lending Program.

Tobik said larger banks likely think the majority of their clients can refinance or pay off their debt, using a backstop program.

Even when loans do go bad, bigger banks have plenty of other ways to make money, said Mayra Rodriguez Valladares, who advises banks on risk.

“They have asset management, they have investment banking advisory services [and] they have trading,” she said.

Valladares said banks still face plenty of risks. Many businesses are still in forbearance programs and could owe more once those end. Further federal relief is uncertain, and more people are likely to lose their jobs.

“It would not surprise me to see banks in the first and second quarter of next year to again be increasing their loan loss reserves,” Valladares said.

JPMorgan Chase CEO Jamie Dimon said under the bank’s worst-case scenario — a double-dip recession — it would need up to $54 billion in reserves, $20 billion more than it has on hand right now.

COVID-19 Economy FAQs

What’s the outlook for vaccine supply?

Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.

How has the pandemic changed scientific research?

Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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