Bank earnings this week could offer clues to impact of Fed's rate hike

Major banks report their third-quarter financial results this week. On Tuesday, JPMorgan Chase, Goldman Sachs, Wells Fargo, and Citigroup will all report, with more institutions to come later in the week. The reports could start to give us a sense of how higher interest rates from the Fed and higher long-term bond yields are working their way through the economy.

Higher interest rates make it more expensive to borrow money. So Mayra Rodriguez Valladares at MRV Associates will be watching whether the Fed’s rate hike influenced how much new lending banks were doing last quarter “to see if there are consumers who are borrowing less or corporations who are borrowing less.”

But she’s not expecting much of a change, because it usually takes several rate hikes to really influence borrowing behavior.

Christopher Maher, CEO of OceanFirst Bank in New York, said people and businesses have generally kept up with payments on their existing loans, in part, because the job market is doing OK.

”Usually, you wouldn't start to see credit issues until you see more broad-based job loss indicators,” he said.

One way to see how banks are thinking about how risky their loans are is whether or not they’re building up their loan loss reserves — money to cover losses if borrowers default, per Steven Blitz, chief economist at GlobalData TS Lombard.

“That'll give you some inkling as to whether or not the banks think that the potential for default is rising or falling,” he said.

Blitz thinks reserves might not change much this quarter, but if interest rates and inflation stay high, he said to watch that space.