Major banks are bracing for increased risks in their lending practices as interest rates reach levels not seen in over 20 years and inflation continues to impact consumers. In the second quarter of this year, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. This signifies the reserves financial institutions are setting aside to cover potential losses from credit risk, including bad debt and loans.
JPMorgan set aside $3.05 billion for credit losses, Bank of America allocated $1.5 billion, Citigroup’s provision totaled $21.8 billion—more than tripling its reserves from the last quarter—and Wells Fargo reported $1.24 billion in provisions. These increased allocations indicate that banks are preparing for a more uncertain economic environment, where both secured and unsecured loans might result in larger losses. A recent analysis by the New York Federal Reserve revealed that American households are carrying a combined debt of $17.7 trillion comprising consumer loans, student loans, and mortgages.
Rising credit card usage has also led to increasing delinquency rates as pandemic-era savings are depleted. Credit card balances reached $1.02 trillion in the first quarter of 2023, marking the second successive quarter that balances exceeded the trillion-dollar threshold, according to TransUnion. Additionally, commercial real estate remains vulnerable.
Experts suggest that while consumer health was supported by stimulus measures during the pandemic, the long-term risks are only beginning to materialize. Mark Narron from Fitch Ratings highlighted that current financial provisions are guided more by macroeconomic forecasts than by recent loan performance.
The banks anticipate economic growth may slow, unemployment rates could rise, and interest rate cuts might occur in September and December. This outlook indicates a likelihood of increasing delinquencies and defaults in the coming months. Citigroup CFO Mark Mason noted that while the overall U.S. consumer appears resilient, lower-income consumers are experiencing significant financial strain, highlighting discrepancies in consumer behavior based on income and credit scores.
The Federal Reserve continues to maintain interest rates at a 23-year peak of 5.25-5.5%, awaiting inflation stabilization before implementing rate cuts. Presently, while banks predict higher default rates later this year, defaults have not yet increased significantly enough to signal a consumer crisis.
Experts are keenly observing the differences between homeowners, who secured low fixed rates during the pandemic, and renters, who are facing rising rental costs and inflation. With rental prices spiking over 30% since 2019, renters are experiencing heightened financial stress.
For now, the recent earnings reports from major banks indicate strong revenue and profits, dispelling concerns about asset quality. Analysts agree that the banking sector remains robust, confident that the financial system is sound, although they express caution regarding the prolonged high-interest rate environment.