US Recession Forecast? 100% chance

US Recession Forecast? 100% chance  10.19.22

America's 6 biggest banks are expected to set aside $4.5 billion in Q3 to cover future loan losses — why that's a clear bad sign for the global economy

Lauren Bird    October 12, 2022

Fears of a looming recession and a tightening economy are pushing the country’s big banks to prepare for the worst.  According to a report from Bloomberg, six of the biggest banks in the U.S. — JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley — plan to set aside about $4.5 billion to protect against loan losses in their third-quarter earnings.  Banks typically build up their loan loss provisions when there are concerns borrowers won’t be able to make their payments.

It’s not hard to see why they’re scrambling to prepare. The unrelenting increases in the federal funds rate set by the Federal Reserve — now at 3% to 3.25% — has already seen borrowers begin to default on loans, credit card payments and other variable-rate debts.

And by setting aside these massive reserves, banks are signaling they’re anticipating having to handle more losses in the future as consumers continue to feel the squeeze of rising interest rates and scorching-hot inflation.

What these banks are reacting to

Lenders are already starting to feel the effects of the Fed's fight on inflation. Four of the biggest banks in the country are expected to report losses this week in their quarterly earnings reports, including JPMorgan Chase, Wells Fargo, Citigroup and Morgan Stanley.

Normally, a higher interest rate would be a good thing for banks — their earnings tend to rise with interest rates. But banks are seeing a dip amid the fluctuating markets — fewer deals are being made and investors are holding back as warning signs of a recession persist.

And that’s led many banks to add to their loss reserves.

The amount banks add to their loan loss reserves then gets subtracted from its earnings. Conversely, when a bank releases those reserves, that money is added to its earnings.

Banks and lenders adjust their cash reserves according to the potential losses on their outstanding loans — they’re setting aside money for problem loans that get paid late or not at all. When a loan goes unpaid, a bank will tap into the loss reserves cash to cover it.

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https://finance.yahoo.com/news/americas-6-biggest-banks-expected-210000438.html