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12 June 2020

The Economist: Why are bank bosses sounding more optimistic about loan losses?


They were hyper-prudent in April. Now the worst-case scenario might be off the cards

GAUGING HOW badly the coronavirus has damaged the economy is tricky. Pessimists diagnose a far worse recession than that which followed the financial crisis. Optimists predict a sharp recovery, pointing to robust banks and housing markets.

One way to form a view is to look at banks’ loan-loss provisions—the buffers they set aside to cover losses from loans they reckon might soon default. By that standard it seems as if the patient is recovering much faster than first thought possible. On June 9th James Gorman, who runs Morgan Stanley, America’s sixth-largest bank, hinted that its loan-loss charges for the second quarter would be lower than in the first, because “the worst is behind us”. Gordon Smith, co-president of JPMorgan Chase, the largest bank, said that delinquency rates were “meaningfully better” than expected. Even some of Europe’s bankers seem less gloomy.

That is a stark change from just a few weeks ago. In mid-April, as they reported their first-quarter results, America’s top four lenders unveiled $24.1bn in provisions for credit losses, a jump of $18.7bn compared with the first quarter of 2019. JPMorgan increased its provision by nearly $6.9bn, hitting in one quarter the level it had reached in six during the financial crisis. Europe’s lenders also booked bad news.

Why the mood swing? To predict losses, most banks enter economic forecasts into models. The prospects for 2020 are hardly rosy, but it seems at least that economies are no longer in free fall. Employment rose in America in May. Factories in Asia have reopened. The lifting of lockdowns in the West has not yet caused a second wave of infections. Uncertainty forced banks to be hyper-prudent in April. Now the worst-case scenario seems off the cards.

Relief may be premature, though. Central-bank and government action has bought borrowers time. Cheap state-backed loans are keeping firms and households afloat. No one knows how many borrowers will find themselves overburdened with debt when normal payment terms resume later in the year. That is especially true of consumer borrowers, up to a fifth of whom have asked for payment holidays....

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