Credit Crunch: Top 4 U.S. Lenders Hit by Rising Defaults

Banks are getting nervous as consumers fall behind on payments.

Credit Crunch: Top 4 U.S. Lenders Hit by Rising Defaults
Photo by Miquel Parera / Unsplash

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The growing number of U.S. consumers who are unable to keep up with their loan payments is causing concern among the country's largest lenders. The four largest U.S. banks wrote off a combined total of $3.4 billion in bad consumer loans in the first three months of 2023, up 73% from a year earlier.

Banks have benefited for years from the financial strength of U.S. consumers, with record low levels of credit defaults. However, with once-in-a-generation levels of inflation squeezing their savings, Americans are once again starting to fall behind on payments.

Bank executives have insisted that the recent increase in defaults is nothing more than losses returning to normal after pandemic-era government stimulus programs kept consumer defaults artificially low. Although banks have shown a cautious stance, the problem appears to be escalating.

The big four are watching cautiously

Charlotte, N.C.-based Bank of America (BofA) joined its rivals in holding more reserves as a growing number of consumers failed to keep up with their loan payments.

Although Bank of America's enterprise-wide defaults were lower than expected, the firm was forced to set aside an additional $360 million in reserves tied to its consumer business, which the bank attributed to higher-than-expected credit card balances.

Goldman Sachs was also affected by the problem. The platform solutions division that includes the firm's growing credit card effort saw provisions soar to $265 million in the quarter.

The Wall Street giant attributed the increase in part to an increase in net charge-offs in its credit card portfolio.

Wells Fargo & Co. also attributed its $1.2 million in provisions to higher net charge-offs in consumer and commercial loan portfolios.

The San Francisco-based company said it has begun tightening underwriting standards for credit card loans as it seeks to position its debt portfolio for a slowing economy.

JPMorgan Chase & Co, the world's largest credit-card issuer, said bad-card loans soared to $922 million in the first quarter, up 82% from a year earlier. The 30-day delinquency rate on those loans refers to the percentage of loans past due during the last 30 days that have not been paid.

If the 30-day delinquency rate is high, it means that consumers are having difficulty repaying their loans and that the lender faces a higher risk of credit losses. Therefore, lenders often closely monitor this rate and may take steps to reduce the risk of default, such as increasing reserves or reducing the supply of loans.

What can consumers expect?

It is difficult to make accurate predictions about what may happen to consumers in the future, as it depends on many factors, including developments in the economy, monetary and fiscal policy, and changes in the labor market. However, some possible implications for consumers may include:

  • Rising interest rates - If interest rates rise, consumers can expect loans, mortgages and credit cards to be more expensive. This may affect their ability to make payments and increase their debt burden.
  • Increased competition for jobs: If the economy weakens, there may be more competition for available jobs, which may make it more difficult to find work and lower wages.
  • Decreased demand for goods and services: If consumers have less money available to spend due to a decrease in disposable income, a higher debt burden or an increase in prices, there may be a decrease in demand for goods and services, which could affect businesses.
  • Increased financial uncertainty: If financial markets experience volatility or there is a recession, consumers may feel less confident about their financial situation, which may affect their spending and investment decisions.