Why It's Time To Watch Your Banker Like A Hawk
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ValueSide
 March 16 2025
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    A growing number of analysts on Wall Street are calling for a slowing economy — perhaps not an outright recession, but enough of a slowdown to cause headaches for the bankers. With as much debt as we have in the financial system, read “loans” from banks, even a tiny increase in slow payments or defaults can mean big trouble for banks.

    The past five years have been a loan paradise for banks. With all the money printing and outright gifts (stimulus checks) to individuals and corporations, the banks recorded an all-time low in bank defaults. Many borrowers used those additional funds to pay down their loans, resulting in a loan default rate for consumer loans of a mere 1.5% — nirvana for the bankers.

    Predictably, banks, credit card companies, credit unions, mortgage companies, and other lending institutions aggressively promoted new loans. I don’t know about you, but at the peak last year, I was getting multiple credit card invitations in the mail every day — something I hadn’t seen for years. The lenders were on a roll. After all, loans are a bank’s most profitable asset, and with hardly any defaults, it seemed like easy money.

    However, by Q3 2023, all that began to change. That quarter, we saw loan defaults start to exceed the old baseline default rate of 2.5%. While that might not seem like a lot to you and me, to the bankers, their “pain” was beginning to increase. Those loans would have to be written off, and the CEO would have to tell shareholders that the bank’s number one credit expense was rising.

    A good proxy for how a bank’s loan portfolios are performing is seen in the country’s largest bank, JP Morgan Chase. In Chase’s latest earnings report, Q3 2024, the bank just set aside $3.1 billion in loan loss reserves, nearly double the $1.8 billion the bank reserved in Q3 2023. For Chase, loan losses are rapidly becoming a significant issue for upper management.

    This increase in bad bank loans will impact you and me in the months ahead. Many years ago, I advised clients not to be very concerned about their lending institutions, the banks, and savings and loans that carried their mortgages, credit cards, and other lines of credit. That’s no longer the case.

    Back in the day, banks and others were slow to change the terms of a loan. Today, loan contracts are written to provide instant adjustments, almost always in the bank’s favor. A simple email sent out this week can often completely modify the terms of your loan next week. Rates (APR) can be changed instantly, fees modified, and even payoffs can be required in certain circumstances.

    As discussed in a prior article, attractive low introductory rates can see dramatic boosts when the “special introductory” period is over. Zero interest can become as high as 35% (the highest I’ve seen) when the grace period ends in six months or a year. Store cards, affinity cards (group credit cards), and specialty cards (car repair, medical cards, etc.) are especially prone to this kind of interest rate manipulation.

    As credit defaults rise, we’re now at 2.75% up from that 2.5% base, and the incentive for lenders to apply higher rates and fees also increases. For the financial institution, it’s a simple matter: send out an email and start collecting extra bank income to offset those loan losses. I remember attending an American Banker’s Association (aba.com) Conference where speaker after speaker extolled the virtues of “fee income” for their member banks to make up for loan losses. Today, bank fee income is on auto-pilot; hit a specific parameter, and you instantly find your credit card or other loan payment increase.

    So what’s the answer? As consumers, we must become as diligent as the banks in monitoring their loan documentation and notices. No one likes to do this, but you need to pay attention to each “change “ email the bank sends. Also, monitor each monthly statement and look for extraordinary charges. Things may have changed since last month’s statement, so beware.

    Finally, find out what your alternatives are. Is there a competing credit card or loan company that may be less expensive or more generous in terms? Websites like bankrate.com or nerdwallet.com do a fine job of evaluating credit alternatives and the health of your bank or lending institution. Credit services like experian.com will help you find the right card, given your personal credit score.

    Don’t be afraid to switch. If your lender is not meeting your expectations, or its charges are out of line, consider making the change. But do some leg work beforehand. First, survey the alternatives. Go to their websites and find out what meets your requirements. Then, pre-qualify and find out if the new lender accepts balance transfers. If they do, consider moving. Although it’s a pain, all your recurring monthly payments will have to reflect the new credit card, but it’s worth it if you can save a substantial amount.

    If you do make that move, know you won’t be alone. The banks and lenders are already preparing for a more difficult economy. Remember that nearly double in JP Morgan Chase’s loan reserve? It will result in higher fees from the bank. Fees that will be passed on to you. By managing your loans now, while alternative, more attractive lenders are still available, you may save a lot of money in the future.

    Remember: Managing your loan portfolio is as important as managing your investment portfolio.

    **

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    Thanks for reading!

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