American banks are already putting up billions of dollars because of concerns about the effects of the coronavirus pandemic. They expect an avalanche of bankruptcies and bad credit. Business indicators already indicate a slump in the US economy that has never been seen before.
Industrial production, retail, financial sector: The corona pandemic hits important pillars of the US economy with full force. In view of new economic data, experts warn of an “unprecedented crash”. The major US banks are meanwhile preparing with enormous provisions for an extreme crisis scenario. It is becoming increasingly clear that the world’s largest economy is rapidly moving into a painful recession.
This development even exceeded the economists’ gloomy forecasts: US industrial production fell more sharply in March than it had in 1946. Total production collapsed 5.4 percent month-on-month, the Fed said in Washington. Analysts had expected a decline of 4.0 percent. The next bad news: In retail – one of the most important pillars of the US economy – sales in March fell at an historic record rate of 8.7 percent.
“The lockdown in a number of states that began in the second half of March is now eating into economic data,” said Thomas Gitzel, chief economist at VP Bank. US citizens, who are otherwise always keen on consumption, would have to take a break. Even if shopping should pick up again in the coming months, there will be no quick return to the familiar values, Gitzel continued. “The economic uncertainties and higher base unemployment continue to spoil American shopping.”
Banks arm themselves with security buffers
In the meantime, the major US banks in the corona pandemic are preparing themselves for an impending avalanche of loan defaults with security buffers worth billions. The crisis preparedness caused the profits of the industry giants Goldman Sachs, Citigroup and Bank of America to collapse massively in the first quarter, as the latest annual reports show. So far, the banks have only felt the first effects of the crisis – the greatest burdens are still ahead. But in the face of impending bankruptcies and mass unemployment, they can expect a wave of bad loans shortly
Goldman Sachs’ bottom line was $ 1.1 billion in profit last quarter, just over half as much as a year earlier. To arm itself against bad loans, the bank set aside $ 937 million, more than four times as much as a year ago. The enormous provisions are a clear indication of what a major economic downturn large banks like Goldman Sachs are preparing for.
Citigroup suffered a 46 percent drop in earnings to $ 2.5 billion in the first quarter compared to the previous year. The finance company deferred nearly $ 5 billion. The Bank of America also hit the corona pandemic quarterly. Year-on-year earnings dropped 45 percent to $ 4.0 billion. The sector leader JP Morgan had already shown on Tuesday how precarious the US money houses are. The financial giant suffered a 70 percent drop in profits – provisions of $ 8.3 billion (€ 7.6 billion) weighed on the balance sheet.