‘The Big One’ Will Hit the Big Banks

May 25, 2020 (EIRNS)—The seven biggest U.S.-based banks took a total of about $24 billion in new loan-loss provisions in the first quarter, led by JPMorgan Chase at $8 billion. Seems like a lot of preparation for losses in the current general economic plunge. But it’s nowhere, and they will soon enough be crying for bailouts, according to a May 20 Bloomberg News article, “A $150 Billion Pile of Frozen Loans Starts To Worry U.S. Banks.”

During the 2007-08 financial crash, the banking system took losses of about 6% of the banks’ total assets; the loss reserves they’ve taken now are about 1.5% of assets. Business loan losses may be greater in this crisis, as is evident from the millions of closed firms threatened with bankruptcy or going into it. Some $20 billion of debts have gone into bankruptcy in Hertz’s bankruptcy alone. So the large banks are likely to have to take $75-$100 billion more in loan losses, overcoming the “comfortable capitalization” they have bragged about for a number of years. But then there are household debts, from mortgages to credit cards.

Bloomberg reported that about $150 billion in total consumer credit is “frozen,” in various forms of non-payment. It’s May 20 article included a chart of 15 banks, including some large regionals, for which “frozen” loans are currently between 15% and 23% of all those banks’ assets. Banks as a whole are now trying to push customers back into payment: “potentially pushing some out of the programs, as the industry tries to get a clearer picture of how many customers are truly unable to keep up during the coronavirus pandemic.”

If even a large fraction of these securitized, derivatized business and household loans go from delinquent to default, the banks’ entire capital will go, and they will turn to the Federal Reserve for bailouts. This is the terrible result the central banks printing $5 trillion thus far to save the securities and derivatives markets, rather than wise governments closing those markets until economic growth can be restored.