Banks set aside billions as safety net

With tens of millions of Americans out of work and many businesses shut down or operating under restrictions due to the coronavirus, three of the nation’s biggest banks set aside nearly $30 billion in the second quarter to cover potentially bad loans that were fine only a few months ago.

The results from JPMorgan Chase, Wells Fargo and Citigroup on Tuesday offer perhaps the broadest glimpse yet into how badly the pandemic is impacting the financial health of

American consumers and businesses. Bank executives, in conference calls with analysts and reporters, said they underestimated how long the pandemic would last and its impacts on the overall economy.

Bank customers ranging from credit card holders to homeowners to oil and gas companies are in danger of defaulting due to the downturn. Thanks largely to the funds set aside for bad loans, JPMorgan’s profit fell by half in the April-June quarter, Citigroup’s sank about 70% and Wells Fargo reported its first quarterly loss since the financial crisis of 2008.

Back in April the talk among many economists and Wall Street analysts was that the U.S. economy was going to go through a “V-shaped” recovery: the shutdowns and stay-athome orders would cause massive job and business losses, but once reopened, things would quickly return to normal.

That scenario has not played out.

The U.S. coronavirus pandemic is now in month five, with infections hitting records in Florida, Texas and California, causing state and local authorities to again shut down parts of their economies. The trillions of dollars in economic support passed in April to keep Americans and businesses afloat is now mostly running out. Enhanced unemployment benefits expire at the end of the month unless Congress acts, and at this point many consumers are upward of 90 days past due on debts that would be in collections if it wasn’t for government and banksponsored forbearance programs.

Bankers now seem to be bracing for the economy to keep struggling in the months ahead. The efforts to reopen local economies across the U.S. have contributed to the growing number of infections. California, the nation’s most populous state, on Monday scaled back many of its reopening initiatives as virus cases, hospitalizations and deaths all rise.

The Federal Reserve last month told the nation’s biggest banks to brace for a potential double-dip recession, with things deteriorating once again later this summer and into fall.

“The pandemic has a grip on the U.S. economy and it doesn’t look like it will loosen until a vaccine is available,” said Michael Corbat, the CEO of Citigroup, in a call with investors.