The largest banks in America are absorbing billions of dollars in bad loans. Bank CEOs are sounding the alarm on a lasting recession.
The biggest banks in America are starting to feel the wrath of the coronavirus pandemic and are expecting a prolonged recession.
One of the hardest hit by the crisis is Wells Fargo after its profits dropped 89% in Q1. JP Morgan is not far behind as the investment bank’s first-quarter profit sank to its lowest level in seven years. Meanwhile, the net income of Bank of America and Citigroup were nearly cut in half in the same quarter.
It seems that a massive economic storm is brewing. The largest banks in the nation expect tens of billions of dollars in defaulting loans on top of a fresh wave of unemployment. It appears we have the catalysts for a lasting recession.
The coronavirus pandemic is starting to make its presence felt on Wall Street. America’s largest banks suffered tremendous losses in the quarter ending March primarily due to souring loans.
CBS News reported that Wells Fargo, JP Morgan, Bank of America and Citigroup expect borrowers to default on more than $71 billion in debt.
That’s just the tip of the iceberg. The $71 billion projection only takes into account the last few weeks of March. With shelter-in-place orders persisting through May, analysts say that bad loans could skyrocket.
As a precaution, big banks are setting aside billions of dollars in reserves.
Unfortunately, the reserves may not be enough. More borrowers are likely to default as the coronavirus hits white collar workers.
The first wave of unemployment hit workers who had to work in a contained space such as restaurants, hotels, malls and airlines. It appeared that those who work in front of their computers were safe. That doesn’t seem to be the case anymore.
A Wall Street Journal poll shows that economists expect an additional 14.4 million Americans to lose their jobs in the coming months. This will bring the unemployment rate to a record 13% in June. Goldman Sachs echoes this view as the bank sees 37 million jobs scrapped by end of May.
As sales go dry, companies are forced to layoff employees. Even non-essential healthcare workers are now vulnerable.
The record-breaking job losses will likely put more stress on the financial system as well as the economy. We may have a recipe for a prolonged recession.
As more Americans fail to meet their financial obligations, the heads of the big financial institutions are preparing for the worst. Goldman Sachs chief executive David Solomon is thinking along this line as he said,
You have to operate under the assumption that we’ll be operating in a recession for the rest of 2020.
Paul Donofrio, Bank of America’s chief financial officer, believes that the recession could go beyond 2020. The executive expects
negative growth rates in GDP extending well into 2021.
These banking bigwigs are suggesting that a massive economic storm is brewing. Conditions are likely to get worse before they get better.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:49 PM