The unemployment rate and the level of the stock market get the most attention.
But a better way to see how the coronavirus pandemic is affecting the economy is by looking at how much money banks are setting aside, or putting on reserve, to cover losses of the businesses and people to whom they loaned money.
In their role as lenders of first resort, bankers have front-row seats to the economy as it unfolds. They see both the demand for money and the ability of borrowers to repay their loans.
And in April, when their first-quarter results came out, they revealed they were putting aside three to four times as much money as they normally did for bad loans, credit card defaults and other troubles.
For U.S. Bancorp, the Minneapolis company that runs the nation’s fifth-largest bank and has a sizable presence statewide, that meant a $993 million provision, with $600 million tied to future loss expectations. That was more than twice what U.S. Bank usually puts aside in a quarter for bad loans, credit card defaults and other problems.
Wells Fargo, which is larger than U.S. Bank but vies with it for the most assets and branches in Minnesota, built its loss reserves by $3.1 billion in the first three months of the year. And TCF Financial, the state’s No. 3 bank, put aside $96.9 million, including $74.1 million for COVID-19 effects.
In recent weeks, investors and analysts have speculated that most banks will raise the amount they set aside, or put in reserve, in the second quarter. During a virtual conference with analysts last week, U.S. Bank executives said they will add more to the bank’s reserves because economic indicators, such as the unemployment rate, are worse than they expected three months ago.
“The reserve build in the second quarter will be higher than the reserve build in the first quarter and it’s primarily driven by how economic outlooks have changed since late March,” Terry Dolan, the company’s chief financial officer, said.
Like the rest of the U.S. economy, banks were thriving until February, when the need to fight the virus forced people to work and learn from home and brought on the first recession since 2008. But they were also in the midst of a slow but steady consolidation, driven chiefly by the need to spread out high costs of building digital services.
That force helped drive TCF into a “merger of equals” with Michigan-based Chemical Financial Corp., a deal that closed in August and resulted in the company’s headquarters being based in Detroit. And it also triggered a tug-of-war between the trustees and management of Minnesota’s largest privately held bank, Bremer Financial Corp., that remains unresolved.
The wave of deals before the pandemic also led the Minneapolis-based investment bank Piper Jaffray last year to acquire New York-based Sandler O’Neill, a boutique investment bank that specializes in advising financial mergers.