Big banks like JPMorgan Chase , Bank Of America, Citigroup, Wells Fargo, and Goldman Sachs are preparing for losses in 2020 from loans they made. Here is how much in cash the largest U.S. banks have set aside over the first half of 2020 to cover their loan losses:


		JPMorgan Chase: $18.8 billion		Citigroup: $14.9 billion		Wells Fargo: $13.4 billion		Bank of America: $9.9 billion		Goldman Sachs: $2.5 billion
That is a total of almost $60 billion these 5 banks expect to lose on their loans in 2020.
With almost $19 billion set aside for losses, why didn’t JPM stock drop?
Answer: It’s simple




This is how banks work
Let’s step back a bit. If you’re a big bank, you get to borrow interest-free. Not sure? Just check your bank account, they aren’t paying you much, if anything, on your checking or savings account balances. The banks then lend to businesses and consumers at a much higher rate.
But here’s the thing: loans gone bad? Investors need not worry.
The U.S federal reserve is backing up the banks. This was all too clear in 2008 when the Fed bailed out the banks with billions of dollars in no-strings-attached cash, and things won’t be too different this time either. In fact, here is JPM stock comparison during the 2020 COVID crisis to 2008.




Here is JPMorgan for you at the end of Q2 2020:
1. JPMorgan’s lending*


		Mortgage loans of $189 billion		Credit Card loans of $142 billion		Auto loans of $59 billion		Personal, Student and Small Business loans of $47 billion		Commercial Real Estate loans of $103 billion		Commercial and other loans of $425 billion		Total Loans of $979 billion
2. JPMorgan’s borrowing*


		Consumer deposits (savings accounts, checking accounts, time deposits, etc.) of $1.93 trillion		Short-term borrowings of $48 billion		Long-term debt of $317 billion		Total Borrowings of $2.29 trillion
Now, the net interest income for JPMorgan (which is the cash remaining in its coffers after removing any interest it has to pay from the total interest it earns across its huge portfolio of loans) was $28.3 billion for the first half of the year. So the $18.8 billion it set aside to cover loan losses for this period wiped out a good two-thirds (67%) of its net interest income.




Here is the full picture of JPMorgan’s revenues: what’s big and what’s changed over the years.
So in summary, despite large amounts marked out for 2020 losses, two things will be true when Covid-19 subsides – whether it’s early 2021 or later:


The U.S. federal reserve is backing JPM, and it will pump in more money into JPM and other banks if they need it. So it doesn’t matter how deep the losses. The customer money JPM has borrowed – the checking and savings accounts balances – won’t be at risk. This sounds big, a bit crazy – but JPM is deemed systemically important. Too big to fail!Once economic activity recovers, as we saw post-crisis in 2008, the loans will be profitable again.
Put the two together, and every dip in bank stock looks like a buying opportunity.
* ‘Lending’ represents the money lent out by JPMorgan to its customers as different types of loans. ‘Borrowings’ show how JPMorgan raises funds to lend – predominantly from deposits maintained by customers with the bank. We have simplified the lending and borrowing sources in the interest of clarity.




JPMorgan Chase , Bank Of America, Citigroup, Goldman Sachs, Morgan Stanley they are all systemically important banks. Apparently, too big to fail. As a representative example, here is JPMorgan for you at the end of Q1 2020:
1. JPMorgan’s lending*


		Mortgage loans of $196 billion		Credit Card loans of $154 billion		Auto loans of $61 billion		Personal, Student and Small Business loans of $28 billion		Commercial Real Estate loans of $103 billion		Commercial and other loans of $473 billion		Total Loans of $1.02 trillion
2. JPMorgan’s borrowing*


		Consumer deposits (savings accounts, checking accounts, time deposits, etc.) of $1.84 trillion		Short-term borrowings of $52 billion		Long-term debt of $299 billion		Total Borrowings of $2.19 trillion
3. Roughly 3.5% average interest earned on loans, net of borrowing costs, times $1.02 trillion of lending = ~$36 billion in interest revenues. Annually.
Here is the full picture of JPMorgan’s revenues: what’s big and what’s changed over the years.




But The Banks Have An Undisclosed parent: The U.S. Federal Reserve
Imagine a world where anytime your own personal ability to borrow felt at risk, ever, your rich uncle with an enviable money machine, steps in. This uncle lends you money, licks your wounds, and makes sure everyone knows you have access to his unlimited funds. Most of us don’t have that uncle and consider this so far-fetched, don’t even dream that possibility. That’s a good thing maybe; it shapes our character, keeps us on our toes
This isn’t true if you are JPMorgan or one of the large U.S. banks, though. We all saw this in 2008, and again now. In fact, here is JPM stock comparison of 2020 COVID crisis to 2008.
Whether it’s good or bad is subjective. What we do know is: it keeps the status quo “This is the way!”
If businesses – small and large, homeowners, and people JPMorgan lends money to fall in trouble as a group for whatever reason, and they decide that they can’t pay JPMorgan back for a period, or ever, the rich uncle is right there even before JPMorgan places a call. The U.S. Federal Reserve steps in, beefs up confidence and provides access to unlimited funds so that JPMorgan’s borrowers don’t immediately rush to withdraw their money in bank deposits.




How does it help, and who?
This is how the system works: JPMorgan and the other big banks are an important part of the money plumbing of our society. The belief is, we need them to get money efficiently to individuals, and to small and large businesses. It’s a utility. It’s essential. And the Federal Reserve’s intervention keeps the system running. Much to debate whether this is right or not, but sure keeps it going.
The primary group of benefactors is the common people. People like us who ‘lend’ money to JPMorgan by maintaining a checking or savings account with the bank. We don’t have to worry about our money with JPMorgan being at risk.
Who else? JP Morgan’s stockholders!
Is that fair? Absolutely, if you’re a JPMorgan shareholder, it’s “nice.”




What – not everyone has at least $100K of holdings in JPMorgan’s stock? What about $10K – maybe through your retirement account?
If it isn’t fair, well, what’s the right answer. We all know this – if you’re a large JPMorgan shareholder, and you ask Bernie Sanders what he thinks, you won’t like the answer.
 
However, it might also be unsustainable
Here’s why: The current system gave rise to at least one Bernie Sanders who believes there is gross inequality. If this continues, there will be many more, and at some point, this current set up between JPMorgan and the Federal reserve will be changed, toppled.
Until then, shareholders rejoice!