US Banks On Hook For $150 Billion In "Frozen Loans" As Millions Of Americans Skip Credit Card And Car Payments | WHAT REALLY HAPPENED

US Banks On Hook For $150 Billion In "Frozen Loans" As Millions Of Americans Skip Credit Card And Car Payments

One month ago, after the banks reported Q1 earnings, we showed that the major US money center banks saw their loan loss provisions surge by roughly 4x from year ago levels in response to expected deterioration in their loan books, with JPMorgan jumping the most, or just over 5x, hinting the other banks are likely underprovisioned for the storm that is coming.

Putting it in context, so far the Big 4 banks have reserved an additional $24BN in Q1 for future loses. But if the GFC is any indication of the defaults that are about to be unleashed, the real amount of losses, discharges and delinquencies will increase 3x-4x compared to the current baseline, meaning that over the next several quarters, banks will have to take another $75-$100BN in reserves on loans that go bad, wiping out years of profits, which were used not for a rainy day fund but to pay for - drumroll - buybacks.

As we concluded, "this to put it mildly, is a major problem for banks which until now were seen as generously overcapitalized, because if the US banking sector is facing $100BN (or more) in loan losses, then the Fed will have no choice but to once again step in and bail out the US financial sector."

Of course, merely delinquent debt does not mean it is automatically in default, a state that usually follows several months of non-payment. However, the longer consumers ignore, or are simply unable to make a scheduled payment, the higher the odds that a delinquent loan will eventually end up in default, resulting in a loan loss for the issuer bank. Ultimately, the total amount of loan losses will dictate if banks are over or under-reserved.

The question, then, is whether our worst-case $100 billion estimate was in the ballpark?