Deprcon Outlook Special Issue

November: Loan loss scenarios for U.S. banks

Like explained by Tuomas past week, the U.S. banking sector keeps on sinking under the illusion of stability created by the Bank Term Funding Program, or BTPF, of the Federal Reserve. Despite of it, a “silent” bank run has continued, unabated, since March and loan losses are accumulating in the balance sheets of U.S. banks.

In this special issue, we will construct three scenarios to simulate loan losses the U.S. banks are likely to face. The three scenarios run from a ‘soft-landing’ to a repetition of the Great Depression. Needless to say that losses faced by banks differ rather drastically between the scenarios. We will naturally also present GDP growth forecasts and update the Chinese debt stimulus.

GDP Forecasts

(GnS Economics, OECD, Q-to-Q). Combining the latest OECD data with our nowcasts, indicates that both the Eurozone and Finland have entered a recession. Moreover, the Aruoba-Diebold-Scotti Business Conditions Index, used in our U.S. nowcasting model, fell deeply in the negative in October; to levels last seen during May and December in 2022 (remember that the U.S. experienced a short “technical” recession in Q1 and Q2 2022).¹ This indicates that business activity in the U.S. is currently contracting sharply.