Banks this year are operating under a new accounting methodology called the current expected credit losses (CECL) method, which requires banks to try and project losses over the life of a loan as soon as it is originated and put on the balance sheet. What this means, at least in theory, is that banks should be essentially front-loading their credit provisions initially to account for all potential losses on current loans. Thus, reserve levels should start to level off in subsequent quarters, building new reserves mostly for new loans. Following this thought process, again in theory, banks should have taken their largest quarterly provision in March.
But, obviously, with so much uncertainty because of the coronavirus and the first quarter of the year being the first time banks used CECL, I don't think too many analysts were surprised to see second-quarter provisions at similar levels of those in the first quarter, or even a good deal higher. However, some banks saw their second-quarter provisions not just go up but more than double from first-quarter levels. Even though CECL is new and the coronavirus pandemic is an unprecedented situation, these increases in my opinion are concerning, because they essentially mean banks took too rosy of an outlook instead of thinking conservatively, especially in a fluid situation like this. Here are four banks that clearly did not do a great job of forecasting the economy at the end of the first quarter.
Image source: Wells Fargo.