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: Marketplace
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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
Big banks, like JPMorgan Chase, are feeling more confident about the economic recovery after solid third quarter earnings. Spencer Platt/Getty Images
HTML EMBED:
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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

How many people are flying? Has traveled picked up?

Flying is starting to recover to levels the airline industry hasn’t seen in months. The Transportation Security Administration announced on Oct. 19 that it’s screened more than 1 million passengers on a single day — its highest number since March 17. The TSA also screened more than 6 million passengers last week, its highest weekly volume since the start of the COVID-19 pandemic. While travel is improving, the TSA announcement comes amid warnings that the U.S. is in the third wave of the coronavirus. There are now more than 8 million cases in the country, with more than 219,000 deaths.

How are Americans feeling about their finances?

Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.

Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.

What’s going to happen to retailers, especially with the holiday shopping season approaching?

A report out recently from the accounting consultancy BDO USA said 29 big retailers filed for bankruptcy protection through August. And if bankruptcies continue at that pace, the number could rival the bankruptcies of 2010, after the Great Recession. For retailers, the last three months of this year will be even more critical than usual for their survival as they look for some hope around the holidays.

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