Banks Stockpile Cash to Prepare for Wave of Coronavirus Loan Defaults

Jul 17, 2020Banks & Credit Unions, News

Some of the largest U.S. banks, including JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo, are choosing to stow away billions of dollars to prepare for future defaults and other loan losses, anticipating that the worst of the COVID-19 recession is yet to come. The amounts being reserved—totaling $28 billion between the three banks—far eclipsed the amounts stockpiled during the first quarter.

“This is not a normal recession,” said James Dimon, chief executive of JPMorgan, according to the Wall Street Journal. “The recessionary part of this you’re going to see down the road.”

The largest bank by assets, JPMorgan has stated that it stowed away extra cash to prepare for a long-standing, high unemployment rate and a slower gross domestic product recovery than it assumed at the start of the COVID-19 crisis. The bank has set aside $10.47 billion to cover losses, cutting its second quarter profits in half.

During the current economic downturn, Americans took on record amounts of credit card debt, student loans, and auto loans. As new shutdowns occur with a second wave of coronavirus cases, banks are preparing for an extended downturn marked by missed payments and defaults.

This economic situation has been unique in that banks have granted payment pauses for mortgage loans, auto loans, and commercial loans. The federal government has also provided stimulus to keep Americans afloat, but banks foresee an extended downturn as the Congressional relief measures fizzle out.

“May and June will prove to be the easy months in terms of this recovery. Now we’re really hitting the moment of truth in the months ahead,” said Jennifer Piepszak, JPMorgan’s CFO.

Wells Fargo, the U.S. bank hit hardest by the pandemic, set away $9.57 billion to prepare for a surge of loan defaults, and shares have fallen by more than half since January 1.

Citigroup Inc. stowed away $7.9 billion as it expects an increase in soured loans, causing its profit to fall 73 percent.

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