Why banks keep cash to cover bad debts

There is something special about this season. The air is cooler, the leaves are changing color, and businesses are issuing their latest quarterly reports. Yes, we are in the middle of the earnings season. And recently, we’ve heard from many businesses gearing up for a colder economy. Call me hoarding acorns.

On Tuesday morning, Goldman Sachs have more cash to cover bad debts, compared to the same period a year ago. Over the past few days, several other banks have said they are doing the same. bank of america, JP Morgan Chase When wells fargo.

As the economy begins to frighten, bank executives have to make decisions about outstanding loans.

“How likely is it that management thinks that all the loans they run on their balance sheet will actually be paid back?” said Kathryn Judge, a law professor at Columbia University. says.

The idea, she said, is to set aside cash now in case the borrower defaults later.

In fact, this is what banks did when the pandemic first started.

“And that’s because we had a big shock to the economy and we didn’t know exactly what the impact would be,” said the judge. “But they all really thought this would really hurt borrowers. It will hurt household budgets, and it will hurt businesses.”

But today’s economy looks much better than it did in early 2020.

Gerald Cassidy, a banking analyst at RBC Capital Markets, said people generally don’t have a problem paying off their debts now.

“In fact, the current credit situation in the industry is very strong, both on the consumer side and the commercial side,” he said.

That may change when the economy hits. People can lose their jobs and struggle to pay their bills. Businesses can lose sales and struggle to pay off debt.

Banks are basically taking off their sweaters for the winter, said Karen Petrow of Federal Financial Analytics.

“We may not need them. Maybe winter will be warmer than we think, but we have sweaters. We bought sweaters. We’re ready.” .

And if there’s a mild recession or no recession, Petrou said putting those sweaters back together is no big deal.

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