Wall Street’s biggest banks are beginning to build their defences against downturns, signalling an end to the steady thinning of reserves that has helped boost profits in the past five years.
Tapping into reserves set aside for bad loans has become a reliable source of income for the banks in the post-crisis environment, allowing them to offset the effects of weak demand and ultra-low interest rates. Regulators let lenders dip into reserves in this way if they can argue that an improving outlook makes losses less likely.
But the practice is expected to have a limited impact on the banks’ third-quarter profits, which begin to be presented this week, because reserves have been run down about as far as they can go.
While some banks with plump cushions of reserves could still make net reductions, others are at an “inflection point,” said Jennifer Thompson, an analyst at Portales Partners in New York. Lenders with big exposures to energy could see “dramatic” increases in reserves, she said, while related sectors such as materials, commodities and industrials also look vulnerable to rises.