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  • Writer's pictureRealFacts Editorial Team

Bank’s Caution Amidst Recession Preparedness for 2023: A Mixed Outlook

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The story about banks getting ready for a recession that didn't happen in 2023 shows they're being careful due to rules and their own cautiousness. Even though the economy stayed strong, banks kept a lot of money set aside for possible loan losses, even more than before COVID-19. While this cautious planning at first made their profits lower, it might turn out well for investors next year, especially if the economy stays stable.

In CNBC’s article, “Bank loan loss reserves are high. What that means for the economy and earnings,” Jessee Pound quotes Bob Elliott, CEO and chief investment officer at Unlimited Funds and former investment committee member at Bridgewater. Elliott remarks, “From some prodding from the regulators, as well as some conservatism from the leadership of many banks, they pre-provisioned on the risk that there might be more substantive loan losses. And those just largely haven’t materialized.” Elliott highlights the bank’s anticipation of significant loan losses that never came to fruition, attributing this to both government regulations and prudent decision-making by bank leaders. Amid predictions of a modest economic slowdown, there’s speculation that banks might begin to draw less from the reserves they've set aside, potentially boosting their profits. In the same article, MRB strategist Salvatore Ruscitti said, “Banks could even draw down their reserves as charge-offs materialize if they become confident that the worst of the loan losses associated with office real estate are behind them and there is no significant contagion to other property markets,”

But even with all this optimism, people are still being cautious. Lauren Goodwin, who's the main strategist at New York Life Investments, warns about banks having trouble making money because of something called an inverted yield curve, which makes it harder for them to lend money in the usual way. Even though some banks might have too much money set aside, they still have less than they did during past economic downturns. And there are still worries about the commercial real estate market, especially for smaller banks that have a lot of loans tied up in office buildings, where prices have been going down.

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