The World’s Biggest Banks Are Struggling to Keep Up With America’s Money Printing

Bank of America is struggling to compete with America’s money-printing machines.

On Thursday, the bank announced its first-quarter profits, which showed a 47 percent increase in net income to $8.1 billion from the previous three months. Bank of America saw a similar boost to its bottom line as the fiscal and monetary stimulus from US policymakers helped avert the worst-case scenario for many individuals and businesses across the country, similar to Citigroup Inc., which posted a record profit a few hours later in part due to a $3.9 billion credit reserve release. “Credit costs have fallen, and we believe progress in the health-care problem and the economy implies a faster recovery,” said Brian Moynihan, CEO of Bank of America.

For the largest financial institutions in the United States, the Covid-19 scenario poses a dilemma.

New loans are difficult to come by for banks including Bank of America, Citibank, JPMorgan Chase, and Wells Fargo. Politicians and the Federal Reserve want to destabilize the banking industry’s core business.

Bank of America’s deposits climbed by 25% to $924 billion, while consumer banking loans fell by 8% to $291 billion. In the most recent quarter, total loans and leases as a percentage of total assets fell to 30% from 40% a year before. Citigroup’s loans have also shrunk by 8% year over year. These findings, as Bloomberg News’ Shahien Nasiripour pointed out, are consistent with a prevalent phenomenon: Last year, loans and leases declined 8% at the 25 largest US banks, widening the gap between their potential and actual lending for the first time in the Fed’s 36-year history.

This trend, predictably, lowers banks’ net interest income, a key metric that shows how much a company makes from loan payments versus the interest it spends on deposits. In the first three months of the year, Bank of America’s NII barely surpassed the previous quarter’s record low of $10.2 billion. JPMorgan Chase’s net interest income was 40% of total revenue, the lowest in at least a decade, and Wells Fargo followed suit.

For the time being, this isn’t stopping the central banks in the United States from making record profits. They often perform well when the economy is doing well and poorly when the market behaves weirdly, as my Bloomberg Opinion colleague Matt Levine put it. Citigroup’s equity underwriting fees more than doubled in the first quarter, similar to Goldman Sachs Group Inc., due to its dominant position in the market for special purpose acquisition vehicles.

Four other significant banks, including Wells Fargo, have failed bankruptcy examinations.

Five of America’s most prominent banks received terrible news today from the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board.

According to the agencies like BankruptcyHQ, Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street, and Wells Fargo did not persuade regulators that they could go bankrupt without causing financial ruin.

Banks must ditch their existing resolution strategies by October and create new ones. If a bank fails to meet the deadline, the authorities warned, “it may be subject to more stringent prudential restrictions.”

These “prudential criteria” could include liquidity, leverage, or capital limits, as well as restrictions on the company’s and its affiliates’ expansion, activities, or operations.

The deadline for resolution plans, sometimes known as “living wills,” was July. As part of the Dodd-Frank Act, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) require banks with assets of more than $500 billion to prepare living wills. The goal is to avoid the shambles that followed the 2008 collapse of Lehman Brothers.

Sales and trading revenue at Bank of America climbed by 17%, exceeding estimates and allowing the bank to take on additional debt.

It’s unclear if a strong economy bolstered by long-term stimulus would benefit US banks. To be clear, offering additional unemployment benefits by extending forgiven loans to small businesses during a once-in-a-century epidemic makes sense. At the same time, while they consider returning to work, Americans grapple with child care and health difficulties. However, such regulations, together with the Fed’s $120 billion monthly bond purchases, undoubtedly reduce demand for traditional banking institutions. So far, it appears that bank officials are unwilling to modify their lending restrictions in order to give new loans, possibly in the hope of normalizing lending once more Americans receive immunizations.

Large banks are attempting to persuade the Federal Reserve to make permanent changes to the supplemental leverage ratio, which compels them to retain a specific amount of capital against their assets without taking risk into account. During the outbreak, the central bank temporarily removed US Treasuries and Fed deposits from the denominator, allowing banks to continue lending. Assume they are unable to provide additional loans and instead want to repurchase billions of dollars’ worth of stock. In that circumstances, it’s hard to understand JPMorgan Chief Executive Officer Jamie Dimon’s stance on the SLR. He claimed last week that it’s “more of an economic limitation than a drag on JPMorgan Chase,” and that the company “would be OK otherwise.”

JPMorgan, like its competitors, will very certainly find a way to win regardless of the circumstances. However, they may soon be forced to rely on income from sources other than loans. According to incoming CEO Jane Fraser, Citigroup is abandoning retail banking in 13 Asian and European locations and focusing on “capturing the robust growth and attractive returns available in the wealth management business” through centers in Singapore, Hong Kong, the United Arab Emirates, and London. If loan levels remain low, it will be interesting to see how banks in the United States adapt their priorities.

As I previously stated, Wall Street banks were determined in this crisis to be heroes rather than criminals, as they were in 2008. Throughout the outbreak, they did everything they could to help their customers. They could not have predicted the federal government surpassing them and greatly stepping up. A large financial institution with a large cash reserve wields great power. To the exclusive issuer of US dollars, however, it is insignificant.

Kayla A. Murphy