Major banks are bracing for potential risks in their lending practices as interest rates reach levels not seen in over 20 years and inflation continues to pressure consumers. In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses. These reserves are set aside to cover potential losses from credit risks, including bad debts and loans such as commercial real estate.
JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses surged to $21.8 billion, more than tripling its reserve from the previous quarter. Wells Fargo reported provisions of $1.24 billion.
These increased reserves indicate that banks are anticipating a riskier lending environment, where both secured and unsecured loans could lead to greater losses. A recent analysis by the New York Federal Reserve revealed that Americans owe a combined $17.7 trillion in consumer loans, student loans, and mortgages. Additionally, credit card issuance is rising, with balances reaching $1.02 trillion, marking two consecutive quarters above the trillion-dollar threshold, as many draw on credit to cope with dwindling pandemic-era savings.
Experts suggest that banks may face challenges in the coming months. Mark Narron, a senior director at Fitch Ratings, noted that current provisions reflect the banks’ forecasts rather than past credit quality. Banks are anticipating slower economic growth, higher unemployment, and potential interest rate cuts later this year, which could lead to an increase in delinquencies and defaults.
Citigroup’s CFO, Mark Mason, highlighted that economic stress is particularly concentrated among lower-income consumers, who have seen their savings diminish since the pandemic. He pointed out a growing divide in financial stability, with higher-income quartile consumers maintaining their savings and lower FICO score customers experiencing declining payment rates due to the impacts of inflation and rising interest rates.
The Federal Reserve’s interest rates remain at a 23-year high of 5.25% to 5.5%, waiting for inflation to stabilize before making any rate cuts. Although banks are preparing for more defaults, experts have not yet observed a significant rise in defaults indicative of a consumer crisis.
Analysts are currently monitoring the distinctions between homeowners and renters, as many homeowners locked in low fixed rates during the pandemic. Renters, facing increased rental and grocery costs—up by more than 30% and 25%, respectively, since 2019—are experiencing more financial strain.
Despite these concerns, the latest earnings reports show strong revenues and profits, suggesting a resilient banking sector. The current stability of financial structures is viewed as a positive sign, though experts caution that prolonged high interest rates will continue to exert stress on consumers and financial institutions alike.