Oct 14, 2022 - Economy & Business

Banks brace for impact by hiking loan reserves

Illustration of a hundred dollar bill with a "PAST DUE" stamp across it.

Illustration: Aïda Amer/Axios

Banks are gearing up to stomach losses on loans despite healthy consumer spending, bracing for the impact of an economic slowdown that may yet become a recession.

Why it matters: The health of the nation's largest financial institutions is a barometer of the economy's well-being.

Driving the news: Multiple major banks reported their quarterly earnings Friday, with JPMorgan Chase and Citigroup among those reporting they are bolstering reserves to deal with a looming downturn.

  • JPMorgan set aside an extra $808 million to absorb loan losses, while Wells Fargo marked another $385 million; meanwhile, Citigroup devoted an additional $370 million to do the same.
  • "I'm trying to be very honest about if things get worse, here's what it means for reserves," JPMorgan CEO Jamie Dimon said on an earnings call Friday.

Be smart: Rising interest rates are widely expected to dampen consumer demand, making it more expensive to borrow to buy a home, purchase a car or carry credit-card balances (which are already soaring).

  • The average rate on the 30-year, fixed-rate mortgage just hit a 20-year high of 6.92%, according to Freddie Mac, Axios Markets co-author Matt Phillips writes.
  • Just a year ago it hovered around 3%.

Yes, but: Consumers have been weathering the storm fairly well so far. And during COVID-19, banks set aside reserves for losses that ultimately never materialized.

  • JPMorgan and Citigroup reported credit-card spending increases of 17% and 14%, respectively.
  • "Overall, our consumer deposit customers' health indicators, including cash flow, payroll and overdraft trends, are still not showing elevated risk concerns," Wells Fargo CEO Charlie Scharf told investors Friday.

The big picture: Inflation is hiking everyone's cost of living, making it harder to pay the bills.

  • For banks, that's good and bad: Good because they make more money when people borrow to cover expenses — but bad when they don't pay pay back the money they took out to do so.
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