Major banks are bracing for increasing risks in their lending practices as interest rates remain at highs unseen in over two decades and inflation continues to press on consumers. In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all boosted their provisions for credit losses compared to the previous quarter. These provisions are funds set aside to cover potential losses associated with credit risk, such as delinquent debts and commercial real estate loans.
Specifically, JPMorgan allocated $3.05 billion for credit losses, Bank of America set aside $1.5 billion, Citigroup’s allowance reached $21.8 billion—more than tripling its previous reserve—and Wells Fargo had provisions totaling $1.24 billion.
These reserves indicate that banks are preparing for a riskier landscape, where both secured and unsecured loans may lead to larger losses. A recent analysis from the New York Fed revealed that Americans collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are rising, as many consumers are depleting their pandemic savings and increasingly relying on credit. Credit card balances hit $1.02 trillion in the first quarter of this year, marking the second consecutive quarter with total balances exceeding a trillion dollars, as reported by TransUnion. The commercial real estate sector also remains fragile.
Business analysts note that the landscape reflects the challenges emerging from the COVID era, primarily due to the consumer stimulus measures that were enacted. However, challenges for banks may increase in the coming months.
According to Mark Narron, a senior director at Fitch Ratings, current provisions do not necessarily indicate past credit quality but instead forecast future expectations. Banks are predicting slower economic growth, a rising unemployment rate, and anticipated interest rate cuts later this year, which could lead to higher delinquencies and defaults by year-end.
Citi’s CFO Mark Mason highlighted that the issues seem most pronounced among lower-income consumers, who have seen their savings diminish since the pandemic began. He noted that only high-income individuals have managed to retain savings, while those with lower FICO scores are experiencing more significant payment declines and increased borrowing due to the stress of high inflation and interest rates.
The Federal Reserve currently maintains its interest rates between 5.25% and 5.5%, their highest level in 23 years, in anticipation of inflation stabilizing toward the 2% target before implementing rate cuts.
Despite preparations for potential defaults, analysts indicate that such defaults have not yet risen dramatically enough to signal a consumer crisis. Observers are especially noting the distinction between homeowners and renters. Homeowners, having locked in low fixed-rate mortgages, are largely shielded from the impacts of rising rates, whereas renters, facing skyrocketing rental prices, are experiencing significant budgetary strain.
For now, positive indicators such as strong revenues and resilient net interest income suggest that the banking sector remains robust, although analysts urge caution, emphasizing that prolonged high interest rates may increase bank stress over time.