Recovery equals repayment. So America’s biggest lenders—Bank of America, Citigroup, JPMorgan and Wells Fargo—have favourably re-evaluated their loan books. In September JPMorgan expected as much as $33.6bn of its $1trn loan book to eventually go unpaid. By the end of December a little under $1.1bn was written off for good. But the bank also now thinks that around $1.8bn that it had previously expected to be lost will be repaid. These averted hypothetical losses add to profits.
This bonanza is a victory for those who spent the past decade attempting to make banks safer. In the past investment-bank earnings were more tied to the economy, thanks to fat portfolios of assets like mortgage-backed securities. Now banks must hold so much capital against volatile assets that they do not bother. When markets whipsawed last year they earned the upside (bumper trading revenues) without the downside (losses on volatile assets).
But this earnings season has also revealed how sensible rules can go awry in bizarre times. Banks are usually keen to amass customer deposits. They are cheap sources of funding; the more deposits a bank holds, the more it can lend. Over the past year, monetary easing by the Federal Reserve has injected vast amounts of cash into the banking system and led deposits to balloon. In 2020 an additional $580bn or so piled up at JPMorgan, and $360bn at Bank of America. On one earnings call an analyst called these deposit mountains an “embarrassment of money for the industry”.
Yet post-financial-crisis rules make this cash pile a problem, not a victory. Big banks face high capital requirements if they grow too large. The penalties would be worthwhile if there were enough profitable opportunities. But loan demand has been low. System-wide loan-to-deposit ratios have plummeted, from 94% in 2008 to 64% last year. The result is that some banks are attempting to shoo away deposits. Jamie Dimon, JPMorgan’s boss, told investors that the bank had asked some of its big corporate customers to move their cash, reducing the deposit base by $200bn. The firm may “shy away from taking new deposits”, said Jennifer Piepszak, its chief financial officer. The covid-19 crisis has shown the resilience of the financial system. But it has also revealed its oddities. ■
