5 reasons bank execs are eyeing a recession

August 10, 2022 4:09 PM

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In a time of economic uncertainty, banks and financial leaders are expressing their concerns. Inflation is becoming a pressing issue and the Federal Reserve is hiking interest rates, leading to many fearing recession.

Learn more about opinions on the recession debate in our roundup.

Fed Chair Powell Delivers Monetary Policy Report To Senate Banking Committee

Tom Williams/Bloomberg

Recession fears have community banks on alert

More than half of the respondents in a recent survey of community bankers said they were concerned the Federal Reserve will overcorrect for rising prices. The report also found bankers in particular are losing confidence that the Fed can keep the U.S. economy out of a recession.

"Now that the Fed has started raising rates, the reality of more rate hikes ahead is starting to set in," said Paul Weinstein, a senior advisor at IntraFi. "Bankers are more wary about whether the Fed is going to go too fast, too far, and will end up creating other problems for the economy."

Industry leaders are also concerned about whether the central bank could lessen inflation without causing other economic problems. JPMorgan Chase began rebuilding their reserves for potential losses during the first quarter in preparation.

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Small banks doubt the Fed can avert a recession

Banks brace themselves for recession ‘hurricane’

JPMorgan Chase CEO Jamie Dimon and Wells Fargo CEO Charlie Scharf are concerned about the future of the U.S. economy.

"Right now it's kind of sunny. Things are doing fine. Everyone thinks the Fed can handle this," Dimon said. "[But] that hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or [Hurricane] Andrew. You better brace yourself."

Scharf was less alarming in his concern. "While there will be some pain as you go through it, overall, everyone will be just fine coming out of it," Scharf said.

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Dimon raises alarm level over recession risk: 'It's a hurricane'

Fed rate rises may cause recession, say top bank CEOs

JPMorgan Chase's Jamie Dimon, Bank of America's Brian Moynihan and Morgan Stanley's James Gorman are warning of a possible recession. The executives say recent interest rate increases from the Fed stand to hurt the economy.

The central bank is raising the benchmark short-term interest rate by a half of a point, which is the largest increase since 2000. They also are introducing a plan to reduce its $9 trillion balance sheet, so markets expect several more rate increases this year.

"That's what the Fed is trying to get right. How do I guide this back to normal after all that stimulus, after all that activity, after the recovery?" Moynihan said.

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Big-bank CEOs warn of recession risk

Economic progress riding on inflation, interest rates and illiquidity

The biggest issues in the economy to date are inflation, interest rates and illiquidity, wrote KC Mathews, CIO of UMB Bank, in a recent opinion article. Since early 2021, the Consumer Price Index has dramatically increased, moving from less than 2% to more than 8%. While some inflation is good for the economy, uncontrollable inflation is bad for both the economy and financial markets.

To combat these issues, the Fed is letting inflation build, hoping to regain control after it has already spiked higher, according to Mathews. As a part of this plan, they are hiking interest rates, a unique turn with no true historical data to follow.

Within the economy, there has previously been rising rate cycles without a recession. This plan could help the economy if the current inflation spikes decrease with help from higher interest rates.

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Three 'Imigos': Inflation, interest rates and illiquidity

Opinion divided on recent history repeating itself

Mark Calabria is in a familiar position. The former director of the Federal Housing Finance Agency claimed there is a "ticking time bomb" in the mortgage industry that is reminiscent of the housing bubble of 2008. He believes poor underwriting standards at the Federal Housing Administration are setting the market up for failure.

"This is going to boomerang in a way where you see this huge contraction once these borrowers go into foreclosure," Calabria said. "We're already seeing one in 10 FHFA borrowers delinquent today — in a strong housing market, in a strong economy. What's going to happen when that turns?"

Other industry experts have more confidence in the housing market. "There is no comparing the credit environment of today to the credit market prior to the Great Recession of 2008," Former Federal Housing Commissioner David Stevens. "Contrary to Mark's view that liberal credit policies are similar, the antithesis of that is true."

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