RPT-BREAKINGVIEWS-Banks extend problem loans into the unknown​

By Stephen Gandel

NEW YORK, May 22 (Reuters Breakingviews) - Economic ructions are lurking just below the surface at U.S. banks. The value of loans that lenders have modified - typically an indicator of borrower stress - has quadrupled in the past two years to $55 billion as of the end of the first quarter. Financiers do have safety nets if IOUs go sour. The pool of money they’ve set aside to cover defaults, though, is shallower than it first appears.

Helping debtors get back on track by adjusting repayment terms can bridge borrowers over temporary rough patches, potentially avoiding losses from unnecessary defaults. If problems prove persistent, though, they can simply delay the inevitable.

Rising stress seems inevitable. President Donald Trump’s chaotic tariff policy has rocked markets, while consumer sentiment is sinking. U.S. bank executives acknowledge perturbations, but largely say there’s little concern in their loan books. Indeed, new delinquencies have slowed. Between the end of the first quarter in 2024 and 2025, loans 90 days or more past due rose by $10 billion. That compares to a $25 billion jump in the 12 months before that, according to Federal Deposit Insurance Corporation data. Nearly all of that improvement appears to be covered by modifications, though, which rose $15 billion.

Even setting this aside, the pools of assets designated to cover default losses are getting shallower. On average, U.S. banks now have just $2.08 in reserves for every dollar of debt past due, down from $2.78 two years ago. Include modifications and the average coverage ratio of all U.S. banks drops to $1.38.

Some 240 U.S. lenders now have less than a dollar in reserves for every dollar of debt for which a borrower is either at least 90 days late or had been before a modification, according to the KBRA Financial Intelligence database. Many of these are smaller community banks, but larger lenders like Bank of America sit around the threshold, too.

This doesn’t guarantee losses. Take commercial real estate loans, a large portion of BofA’s delinquent debts. Defaults here tend to result in higher recoveries, because debt is secured by property, leaving something of value to seize. Other lenders have a relatively larger share of past-due unsecured debt, like credit card borrowings. In that case, some relative difference in reserve levels makes sense.

Yet the mix of loan types making up BofA’s problem loans is roughly the same as it was two years ago, when it had $2.13 reserved to cover losses for every dollar of troubled or modified debt. Granted, the bank has ably weathered a pandemic, rising interest rates and stock-market tumbles. As tariffs and a broader slowdown loom, though, Wall Street is swimming out more exposed into the economic unknown.

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CONTEXT NEWS

JPMorgan Chase increased reserves held to cover loan losses by nearly 70% year-over-year in the first quarter of 2025. This outpaced increases at other major lenders like Bank of America, which set aside 12% more compared to the same period a year ago.

Preliminary data from banks’ first-quarter regulatory reports provided by KBRA shows loss reserves decreasing as a ratio of non-performing loans. The Federal Deposit Insurance Corporation, which collects the data, is set to release its quarterly bank report card on May 28.

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