Bank Loan Losses Hit Three-Year High at $19 Billion

Boston buildings

American banks reported nearly $19 billion in loan losses during the second quarter.

As the Financial Times reported Wednesday (Aug. 9), the $18.9 loan-loss rate is the highest in three years, coming as banks deal with an increase in defaults among credit card users and commercial real estate borrowers. 

Banks lost 61 cents on every $100 loaned out, the report said — the most since 2020 and the start of the COVID pandemic. The rise in losses is being driven by higher interest rates, consumers exhausting savings and landlords coming up empty in search of tenants as people continue to work from home, the report said.

Gerard Cassidy, banking analyst at RBC Capital Markets, told the FT the loan losses mark a return to normality after the pandemic, when banks “became accustomed to very strong quality.”

The report also notes that a number of banks are making provisions for loan losses in case unemployment creeps from its current 3.5% level to 5%.

“What could take them to levels that the market is not expecting and the bank stocks would react unfavorably to?” asked Cassidy. “You would have to come up with what I would call a hard landing for the economy where unemployment reaches somewhere north of 7%.”

Last month brought the news that a little more than half the banks in the U.S. had tightened the terms for commercial and industrial loans

“Drill down a bit, and the banks are also looking to tighten standards through at least the rest of the year,” PYMNTS wrote. “Perhaps no surprise, the respondents cited a ‘less favorable’ and ‘more uncertain’ economic outlook as key considerations in tightening those standards. The banks also cited a deterioration in their own liquidity positions.”

Meanwhile, research by PYMNTS into the health of Main Street small and medium-sized businesses (SMBs) has shown that 40% of these operations remain more worried about inflation than one year ago, while 15% are worried about declining revenues.

Financing, in the form of credit, could be a significant lifeline for these SMBs, with the research showing nearly half of them looking to sources of new financing in the next 12 months. A third of SMBs say they are looking to national banks to access credit.

Consumers, meanwhile, continue to rely on credit cards, so much so that the nation’s credit card debt has surpassed $1 trillion for the first time, according to new Federal Reserve data.

All the same, “despite the many headwinds American consumers have faced over the last year — higher interest rates, post-pandemic inflationary pressures and the recent banking failures — there is little evidence of widespread financial distress for consumers,” the Fed wrote on its blog.