Banks are feeling more confident
Banks hold greater confidence that a large number of borrowers will pay off their debts, as indicated by Wells Fargo and JP Morgan Chase who have reduced their loan-loss provisions. If you’ve never heard of a loan-loss provision, it’s a cushion of cash that banks hold on to in the event that someone takes out a loan but isn’t likely to pay it back. The more money that is held in these provisions, the less certain the bank is that will be repaid.
By looking at the drop in loan-loss provision numbers, it appears that the banks aren’t questioning whether or not they will get paid. JP Morgan had $247 million set aside as credit loan-loss last year and that number has since dropped $47 million this last quarter. Wells Fargo had its credit loss expenses drop from $1.8 billion to $652 million.
Consumers are repaying debts
Consumers are also doing a better job of repaying their debts, which likely contributes to the banks confidence in reducing their loan loss allocations. Reuters reports that loan delinquencies are on the decline, falling from 1.99 percent the previous quarter down to 1.7 percent. The 15-year average for delinquency rates is 2.37 percent. Delinquencies on bank card payments are also at the lowest point that they’ve been in the past 22 years.
Economists state that consumers feel wealthier as home and stock prices are on the rise. This, in turn, increases their likelihood of making bigger ticket purchases that they have been putting off during hardships of recent years, as well as re-committing to paying off any debts that they owe.
However, even with this positive uptick, unemployment numbers are still high and the Fed still wants to see them drop some more before it stops its bond purchase plan. But it’s apparent that major banks are feeling better about the state of its credit and loan markets and believe borrowers will make good on their debts.
