NEW YORK — The major banks in the U.S. are anticipating a flood of loan defaults as households and business customers take a big financial hit from the coronavirus pandemic.
Even the investment banks were not immune to the pandemic. Goldman Sachs’ first-quarter profit dropped by 46% from a year earlier, due to significant losses on its own investments as well as a buildup in reserves for potential loan defaults. One signal on how quickly consumers are pulling back came in the latest retail sales data from the government. Retail sales fell by 8.7% in March, the worst monthly drop in that datapoint on record. Consumers spending accounts for roughly 70% of U.S. gross domestic product, so that drop is particularly troublesome.
Banks have scrambled to come up with payment options for their now-distressed customers, from cutting fees, making monthly payments smaller or allowing borrowers to skip a month's payments altogether. Roughly one in six small businesses that have loans with Bank of America are now in some sort of payment deferral program, the bank said Wednesday.
"These are all guesses at this stage," said Octavio Marenzi with the consultancy firm Opimas, in an email to investors."The credit risk models created by banks have never seen anything like this crisis and are not likely to be able to make accurate forecasts. If anything, it looks like BofA’s loss provisions are on the light side and we expect to see greater provisions for loan losses in Q2.
Good. Banking should never be more than 5% of the GDP ever
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