The world’s biggest banks entered the Covid-19 crisis in good shape and are emerging with an embarrassment of riches. Wall Street lenders made huge profit from trading in turbulent markets and are ending 2020 awash with capital. Their mission for 2021 is finding an acceptable way to spend it.
Banks’ trading windfall is so big it’s practically visible from space. The five biggest U.S. firms — JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America — made $84 billion of combined markets revenue in the first three quarters. Call that $112 billion on a full-year basis. It’s $35 billion more than their average over the past 10 years, boosted by dislocations brought on by Covid-19, central bank support for financial markets, and a nail-biting U.S. election. They made an extra $7 billion too from underwriting share and bond issues.
Next, there’s the effect of the default-hurricane that never happened. Mega-lenders JPMorgan, Citi, Wells Fargo and BofA set aside $52 billion to cover future credit losses this year so far. At JPMorgan, the incremental provisions were a colossal $15 billion. Yet Chief Executive Jamie Dimon says bad debt levels look “great,” mostly because government stimulus has kept borrowers afloat. Much of what they squirreled away should come back in 2021.
Taxpayers do the heavy lifting
Finally, there’s the fortification of banks’ balance sheets. The six biggest Wall Street financial institutions have $128 billion more of equity than they officially need, based on their third-quarter reports, aided by the Federal Reserve’s demand they halt stock buybacks. Incoming Citi boss Jane Fraser will inherit surplus capital equivalent to more than one-fifth of her bank’s market capitalization. And savers have flocked to the big banks. The top 25 gathered twice as much in deposits this year than all of America’s other 5,000 lenders combined.
What to do with all this booty? Bank traders, executives and shareholders will all want a piece. Lower interest rates pose plenty of longer-term challenges. Yet it’s the government, and the taxpayer, to whom Wall Street owes thanks. Their gratitude thus far falls short: in America’s year of need, the big four main street lenders reduced their combined loans by 3 per cent. Banks’ task in 2021 is to find creative ways to aid the real economy — and give back profit that was never really theirs to begin with.