Banks are putting money aside to cover bad debts

There is a special feeling you get during this time of year. The air is getting colder, the leaves are changing color and companies are releasing their latest quarterly reports. Yes, we are in the middle of earnings season. And lately we’ve heard from a number of companies preparing for a colder economy. Call it hoarding their acorns.

On Tuesday morning, Goldman Sachs said it was set aside more money to cover bad debts, compared to the same period a year ago. Over the past few days, several other banks have said they are doing the same, including Bank of America, JPMorgan Chase and Wells Fargo.

When the economy starts to scare, bank executives have to pass judgment on their outstanding loans.

“What do management think is the likelihood that all these loans they carry on their balance sheets will actually be repaid? said Kathryn Judge, a Columbia law professor.

The idea, she said, is to set aside money now in case borrowers default later.

In fact, that’s what the banks did when the pandemic started.

“And it was because there was this huge shock to the economy, and they didn’t know exactly what the effect of that would be,” Judge said. “But everyone actually thought it was going to really hurt our borrowers. It will hurt households, it will hurt businesses. »

But the economy looks much better today than it did at the start of 2020.

Gerard Cassidy, a banking analyst at RBC Capital Markets, said that right now people generally don’t have problems repaying their debt.

“In fact, the current credit situation for the industry is very robust, both on the consumer side and on the business side,” he said.

This could change in the event of a recession. People could lose their jobs and struggle to pay their bills. Businesses could lose sales and struggle to repay debt.

Federal Financial Analytics’ Karen Petrou said banks are essentially pulling their sweaters before winter.

“We may not need it, maybe the winter will be warmer than we think, but we have the sweaters, we bought the sweaters, we are ready,” she said. declared.

And if there’s a mild recession, or no recession, Petrou said it’s okay to put those jerseys back on.

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