U.S. Banks Report Nearly $19 Billion in Loan Losses During Q2

Earlier this month, U.S. banks reported $18.9 billion in loan losses during the second quarter of 2023, according to a report from the Financial Times (FT). That figure is the highest loan-loss rate seen in three years, largely due to an increase in defaults among commercial real estate borrowers and credit card users, as well as increased interest rates, consumers spending their savings, and landlords unable to find tenants as people continue to work remotely. 

Over half of U.S. banks have tightened their terms for industrial and commercial loans.

“Drill down a bit, and the banks are also looking to tighten standards through at least the rest of the year,” wrote PYMNTS. “Perhaps no surprise, the respondents cited a ‘less favorable’ and ‘more uncertain’ economic outlook as key considerations in tightening those standards.”

Banks lost 61 cents for every $100 loaned out, the highest loss since 2020 at the start of the COVID-19 pandemic. Banking analyst at RBC Capital Markets Gerard Cassidy told FT that the loan losses signal a return to pre-pandemic normalcy, when banks were used to strong quality. Several banks are making provisions for loan losses in the event that unemployment rises from 3.5 percent to 5 percent. 

“What could take them to levels that the market is not expecting and the bank stocks would react unfavorably to?” Cassidy asked. “You would have to come up with what I would call a hard landing for the economy where unemployment reaches somewhere north of 7 percent.”

PYMNTS found that 40 percent of small and medium-sized businesses (SMBs) are more concerned about inflation than they were one year ago, and 15 percent are worried about declining revenues. Nearly half of SMBs are also researching new sources of financing in the next year. 

Additionally, consumers are continuing to depend on credit cards, as recent Federal Reserve data shows that the nation’s credit card debt has surpassed $1 trillion for the first time.