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Global Economy

Bank profits as harbingers of recession

Last year, the banks made a lot of money from the upswing after Corona, especially the big US banks. Now they are the first to anticipate an impending economic downturn on their balance sheets. The big US banks traditionally open the number round with the quarterly results. And a look at the books shows a significant slump in profits for almost all of them.

Professor Sascha Steffen from the Frankfurt School of Finance and Management gives the reasons for this. On the one hand, investment banking activities "have gone down. In particular, the entire consulting business, because more and more companies are now waiting to make larger company sales." Due to the slump in investment banking, profits at the major US bank Goldman Sachs almost halved in the second quarter of the year to $2.8 billion. In the same period last year, income from the investment banking business was still $5.3 billion.

The largest US bank, JP Morgan, also earned a good quarter less in the second quarter than in the same period last year. Earnings were also weaker at Bank of America, Wells Fago and Citi Group.

"Do everything we can to counteract a recession"

"The recession is the great danger that is on the horizon, and what are the banks doing? Risks are being reduced," explains Steffen. "You try not to make riskier investments. You try everything to keep the capital ratio high to counteract a recession." In other words, the US banks are making provisions in the billions.

This is also due to concerns about defaulting loans, explains Carsten Brzeski, chief economist at the Dutch ING bank. "Banks expect that the interest rate hike in the US will be too sharp, causing house prices to fall, consumer credit to decrease and the economy to go into recession, and recession will come eventually associated with credit defaults."

US banks benefit from higher interest rates

On the other hand, US banks are making more money again thanks to rising interest rates. The US Federal Reserve – unlike the European Central Bank – raised the key interest rate for the first time in the spring in order to counteract the upward trend in prices.

The environment for banks in the USA is still more advantageous than in Europe, says industry expert Steffen from the Frankfurt School of Finance. "There are several reasons for this: The European banks are much closer to Ukraine, to the Russian conflict. Germany is much more dependent on gas imports from Russia. That means some factors play a role much faster." Despite the high reserves for possible loan defaults, US banks have continued to earn billions on balance. That should look different for German banks.

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