Simply put, this is cash that banks put aside as reserves in order to absorb losses on loans it has extended to borrowers, whether those are small businesses, people or corporations.
That’s been important in 2020, as the Coronavirus has wiped away incomes for many households and revenue streams for many businesses and large companies. So all sorts of borrowers are expected to make late payments or even default on debt. We’re seeing this in mortgage debt, corporate debt and other debts.
So that’s bad news for banks.
Recently, JPMorgan (JPM) - Get JPMorgan Chase & Co. (JPM) Report, Wells Fargo (WFC) - Get Wells Fargo & Company Report and Bank of America (BAC) - Get Bank of America Corp Report have already reported huge increases in their credit loss provision expenses. That expense, reflected on the income statement, eats into the banks’ profit.
So when a bank sees credit losses ahead on what it should receive under loan terms wit borrowers, it sets a set the amount of cash the bank will lose.
Want to see the accounting and math? Watch the quick video above.
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