Big banks are bracing for potential risks associated with their lending practices as interest rates remain at the highest levels seen in over 20 years and inflation continues to pressure consumers. In the second quarter, major financial institutions, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, increased their provisions for credit losses compared to the previous quarter. These provisions, set aside to cover anticipated losses from credit risks, include delinquent debts and issues related to commercial real estate loans.
JPMorgan allocated $3.05 billion for credit losses, while Bank of America set aside $1.5 billion and Citigroup’s allowance reached $21.8 billion, marking a substantial increase from previous reserves. Wells Fargo allocated $1.24 billion for similar purposes. The increase in provisions suggests that banks are preparing for a potentially riskier economic environment, where both secured and unsecured loans could lead to greater losses.
A recent study from the New York Fed indicates that American households collectively owe $17.7 trillion in consumer, student, and mortgage debt, with rising credit card issuance and delinquency rates as people begin depleting their pandemic-era savings. Credit card balances surpassed $1 trillion in the first quarter, continuing a trend of increasing credit use. Meanwhile, the commercial real estate market remains uncertain.
Experts believe that banks are currently forecasting a slowdown in economic growth, a rise in unemployment rates, and potential interest rate cuts later this year, which may lead to increased delinquencies and defaults. Citi’s Chief Financial Officer Mark Mason pointed out that while the overall U.S. consumer remains resilient, there is a notable disparity in financial health among different income groups.
He highlighted that only the highest income quartile has managed to save more than they did before the pandemic, while those with lower credit scores are seeing a decline in payment rates and are more affected by the ongoing economic challenges. The Federal Reserve continues to maintain high interest rates, with the aim of stabilizing inflation toward its 2% target.
While banks are preparing for potential defaults in the coming months, current trends do not yet signal a consumer crisis. Observers are particularly focused on the differences between homeowners, who secured low fixed rates, and renters, who are feeling the effects of rising rental costs and inflation. Despite the challenges, the latest earnings reports indicate that the banking sector remains robust, with strong revenues and net interest income.
Overall, while the financial sector shows signs of strength, experts warn that prolonged high-interest rates could increase stress within the system.