The banks of the U.S. dumped their recession-ready playbooks at the end of 2022.
Regional banks and banks with big credit-card businesses ran up credit balances at higher interest rates in the fourth quarter, which helped to profit from the fact that they had big credit-card businesses. But many tightened their lending standards and set aside more money to cover potential loan losses, signs that they don't expect the good times to last.
Capital One Financial Corp. set aside $1 billion to cover potential loan losses in the fourth quarter, a 33% increase from the previous quarter. American Express Co. increased its reserves by more than 25%, setting aside nearly half a billion dollars. Both had drawn down the rainy-day funds a year ago.
Consumers have been a bright spot in the economy. They continue to spend at a good clip in the face of higher inflation, even though they cut back during the holidays and added to their savings. The unemployment rate is at its lowest level in decades.
There are signs that some households are coming under pressure. Borrowers have put more purchases on credit cards, but they chipped away at balances at a slower rate. In the fourth quarter, consumer and credit cards declined to levels they were at before the epidemic, when government spending on services and savings allowed consumers to bulk up their savings and pay down debt.
Delinquency rates have exceeded the pre-dispandemic levels in some corners of the consumer-lending business.
The percentage of car loans that were more than 60 days past due jumped to 0.89% in the fourth quarter from 0.48% a year ago. More than 2% of its private student loans were 30 or more days delinquent, a half-percentage increase from a year ago, according to Discover Financial Services. Both of those rates were higher in 2019 than in 2019.
HEADWINDS JPMORGAN CEO Roger Hochschild said in an interview that there were a lot of concerns about the economy and the potential for a recession in 2023. Where we are right now, the consumer is doing well, supported by a strong employment market. He said that borrowers are more stressed because of a rise in demand for products used to consolidate debt. In the fourth quarter, Discover's personal-loan balances grew by 14% from a year ago.
Mr. Hochschild said we have been tightening our credit standards. We're always looking for pockets of stress. The process is delicate for lenders because they can hurt their bottom line if they tighten too much.
Gerard Cassidy, an analyst at RBC Capital Markets, said it can almost be viewed as a high-wire act. On the one hand, you don't want to be overconservative and shut down lending, but at the same time you don't want your lending standards to fall by the wayside like in 2006?