Banks Face New Loan Crisis: Rebuilding Reserves

'Provisions' may turn out not to be large enough
By Kevin Spak,  Newser Staff
Posted Apr 22, 2008 12:17 PM CDT
A woman walks by a sign outside of a Bank of America branch office April 21, 2008 in San Francisco, California.   (Getty Images)
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(Newser) – Within Bank of America’s disappointing first-quarter earnings was an unwelcome harbinger for the banking industry, the Wall Street Journal reports. BofA’s results were dragged down by huge additions to its loan-loss provision, an expense many other banks will also record soon. Given current credit conditions, many banks will have to increase their bad-loan reserves, dragging down their earnings.

All banks have money set aside against loan defaults. Putting more money into that reserve counts as an expense on the balance sheet, hurting earnings. Investors know all about loan-loss provisions, but they often underestimate their impact. Most were blindsided by the size of BofA’s big $6 billion provision, which far outstripped its $1.31 billion in trading losses.