Banks Batten Down the Hatches Amid Economic Headwinds

Inflation and the Fed

This week’s inflation report indicated prices continue to march upward, despite the Fed’s efforts to rein them in. Some industries will be more affected than others. Banks, in particular, are feeling the pain as recession fears mount and, in some cases, the appetite for risk decreases. Diminished interest in IPOs and mergers could result in lower revenue for the banks who execute these transactions.

Another factor affecting bank performance is the need to hold reserves that serve as a kind of insurance policy in the event of defaults on outstanding loans. The number of nonperforming loans tend to increase during recessionary times, causing reserve requirements to go up.

Banks Under Pressure

JP Morgan Chase’s (JPM) earnings release this week reveals how current economic conditions are affecting the sector’s bottom line. Shares fell after the largest US bank by assets missed expectations on earnings. The company has shifted to a more cautious strategy in preparation for future global economic distress, which last month CEO Jamie Dimon predicted could be an economic “hurricane.” To that end, JP Morgan fortified reserves for bad loans with a $428 million capital infusion.

Likewise, Morgan Stanley (MS) posted results that came in below analyst estimates. The company’s bottom line has been negatively impacted by what CEO James Gorman referred to as “weaker investment banking activity.”

Deposit Insurance

With many bank stocks now trading near 52-week lows amid increasing concerns over recession risk, some may be wondering if their deposits are safe.

It is important to note that the FDIC, established by the Banking Act of 1933, provides protection to consumers’ bank accounts through deposit insurance. The government will cover up to $250,000 in an individual account and $250,000 each for joint owners. Plus, the FDIC has historically facilitated the transfer of accounts from troubled banks to healthier counterparts.

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