Lenders Prepare for Defaults as Recession Looms

consumer debt

Banks and lenders are setting aside funds to cover loan losses out of fear of a recession.

As The Wall Street Journal (WSJ) reported Monday (Jan. 30), Capital One and American Express are among the companies that increased their rainy day funds, an indication they’re anticipating an end to an era of high consumer spending and record low unemployment.

“I think there are certainly a lot of concerns about what may come with the economy and the potential for a recession in 2023,” Discover Chief Executive Roger Hochschild told the WSJ. “But where we sit right now, the consumer is still doing pretty well supported by a very strong employment market.”

However, Hochschild added that increased demand for debt consolidation products could indicate more stress among borrowers. His company’s personal loan balances climbed 14% between the fourth quarters of 2021 and 2022.

“We definitely have been tightening our credit standards,” he said. “We’re always looking for pockets of stress.”

Among those signs of stress: a growing number of higher-income Americans — 51% — who say they’re living paycheck to paycheck.

As PYMNTS wrote Monday, growing shares of consumers across all income levels report spending the bulk of their monthly income on expenses, finding it more difficult to set aside funds for savings.

At the end of last year 9.3 million more U.S. consumers were living paycheck to paycheck than at the close of 2021, with 8 million of these consumers earning north of $100,000 a year, according to “New Reality Check: The Paycheck-To-Paycheck Report,” a collaboration between PYMNTS and LendingClub.

While some consumers showed optimism about 2023, the report found that 27% expect their financial situation to worsen this year. The reasons? Inflation and economic uncertainty, in most cases, cited by a respective 72% and 66% of consumers.

Meanwhile, consumer spending has been buoyant, as recent earnings results from Visa, Mastercard and American Express have indicated.

But as noted here last week, the most recent data on consumer spending from the U.S. Commerce Department shows American households curbing their spending in the final month of 2022’s closing quarter.

Overall spending fell 0.2% in December from November’s level, and November had already shown a downward 0.1% revision versus October.

And as credit card debt increases, so does interest paid on that debt and other loans. Commerce Department data shows personal interest payments rising, from $380.2 billion in November to $382.5 billion last month, and up from $313 billion in May.