The news: In preparation for an economic downturn, US banks have set aside large sums of money to boost loan provisions and capital reserves in 2023. But the lack of data around the economic assumptions these banks are using makes it difficult to tell if they are preparing enough, or if they’re being a little too optimistic, per American Banker.
Rose-colored glasses: Though bank profits fell in Q3, revenues were strong due to increasing interest rates, and banks spoke confidently about their ability to weather an economic downturn. Many banks set aside reserves to cover potential loan losses in the event that consumers were unable to keep up with their repayments.
But in determining the amounts to set aside, banks used a broad range of economic assumptions that could have led them to differing conclusions. Analysts at Jefferies found the following:
While it’s hard to exactly compare the assumptions—each bank likely uses its own weighting and forecasting methods, and they provide very little transparency into the process—the assumptions differ enough to cause concern that some banks may not actually be doing enough to prepare.
No recession next year: One example of a larger bank with a particularly optimistic outlook is Goldman Sachs. Analysts at the bank compiled 10 reasons why the US won’t experience a recession into the next 12 months. Here are just a few of the reasons:
Goldman did suggest, however, that a recession may come about in 2024. It also set aside $515 million for loan loss provisions in Q3, citing the potential impact of broader concerns regarding the macroeconomic outlook.
The big takeaway: Despite feeling confident going into the new year, banks should remain wary of the unsettled economy. They must not become too attached to increasing revenues driven by high interest rates without also considering the potential for consumers to default on their payments as a result of leaning too heavily on credit.
Banks should also be mindful of the struggles that consumers face. A rosy outlook might cause banks to overlook their customers’ need for support and guidance—a request that’s been growing louder and more widespread as inflation continues to take a toll.
This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.