US Banks Brace For Surge In Loan Losses (S&P 500 Bank / S&P 500 Index Back To Early 2009 Levels)

by confoundedinterest

Here we go again?

With the economic shutdown thanks to the Wuhan virus, the Big Banks are in the US are preparing to be over, under, sideways, down.

(Financial Times) — Loan loss charges at six big American banks reached a total of $25.4bn in the first quarter. This marks a 350 per cent surge in collective provisions across Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley versus a year earlier, as charges soared to levels not seen since the financial crisis.

The change illustrates how banks are ramping up reserves to deal with anticipated loan problems among their clients, as top economists warn that the world economy has already fallen into recession. 

The provisions are additions to reserves so banks have enough in their rainy day fund to cover future losses.

Since the start of the year, US banks have been operating under a new accounting standard, dubbed “current expected credit losses”. It has changed how they calculate loan loss provisions, making it hard to compare the most recent charges with past performance. 

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Previously banks had to ensure reserves were enough to cover ‘incurred losses’, which meant they made provisions for loan losses only when customers actually missed payments.

Under the new accounting standard, banks have to make provisions based on a loan’s lifetime value. In practice, this amounts to predicting the future — a difficult task at the best of times, and nigh on impossible in the current environment, which bank executives describe as the most uncertain they have ever seen. 

It is little wonder that the S&P 500 banks index as a percentage of the S&P 500 index is back near its lowest level since early 2009.

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Despite The Fed’s massive intervention in the financial markets starting in late 2007,  but continues in force.

The Fed couldn’t get the S&P Bank index / S&P index back to early 2007 levels with massive stimulus??

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Fed Chairs Janet Yellen and Jerome Powell pose for recent Fed Chairs painting.

 

 

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