Are Bankers’ Decisions Rooted in Hard Data—or Hope?

With a bruising 2020 entering its final weeks, a sense of cautious optimism seems to be taking hold in the banking sector. Early indications in banks’ third-quarter filings and recent conversations with banking leaders indicate that many see the economic rebound in the second half of the year as a hopeful sign that the worst is behind them.

We get a closer look in our third-quarter CECL Reserving and Credit Benchmarking Study. It compares allowance levels, charge-offs, non-performing loans (based on CARES Act classification/reporting relief), COVID deferrals and other key credit metrics across predominantly domestic US institutions.

The newfound optimism, albeit tinged with caution, represents a sharp contrast to the gloomy outlook that pervaded the sector through much of 2020. Whether that optimism proves justified may not become clear for some time. What we can say with certainty is that bankers continue to face a unique and vexing challenge: Radical volatility in this year’s economic data has severely compromised the predictive models they normally rely on to make decisions about their loan portfolios.