What US Banks' Quarterly Results Can Tell Us About Inflation

JPMorgan Chase, Goldman Sachs and other major banks are due to release their third-quarter results tonight. Markets will look beyond profits to changes in lending, asset quality and the pressure on customers to repay their debts. Changes in credit do not directly determine inflation, but they gradually affect demand by influencing business investment and household spending.

First: how many people still want to borrow?

Banks keep the economy's financial records. Changes in business borrowing and household spending are among the first things reflected in their accounts. The outstanding stock of credit remains resilient: commercial and industrial loans are growing by 9.8% year on year, with balances at their highest level since 2022.

Yet economists at leading North American banks put the credit conditions index for the next six months at just 44.7, signalling a tighter lending environment. They have maintained this cautious outlook for seven consecutive quarters.

Our first priority, therefore, is to watch the willingness to borrow.

Next: how long can banks' interest margins hold up?

The basic way banks make money is straightforward: they borrow at lower rates and lend at higher ones. The difference provides their profit.

When interest rates rise, loan rates increase first, while deposit rates follow more slowly. That delay brings additional income. But this benefit depends on loan rates continuing to rise. If loan yields stop increasing, margins face pressure from both sides: there is little room left to lower deposit costs, and competition for deposits keeps intensifying. If banks are forced to pay more to attract deposits, the spread narrows, signalling that the benefit from high rates has peaked.

Third: how many borrowers are struggling to repay?

Loan-loss provisions are amounts banks set aside in advance for loans that may go bad. An increase in provisions means banks expect the overall risk of bad debts to rise.

But total figures alone do not give the full picture. Take credit cards: the rate of new delinquencies has held at around 7% for eight consecutive quarters, while the share of balances more than 90 days past due has risen to 12.8%, a 15-year high.

These figures appear contradictory because the way the statistics are recorded has changed. When a bank writes off a bad debt, it does not immediately disappear from credit reports. The share of records still appearing on those reports one year after a charge-off has risen from about 40% to nearly 80%. More people are not newly falling behind; instead, old bad debts remain on credit reports for longer, pushing up the measure of long-term delinquency. In other words, old debts are taking longer to clear.

Are high rates reaching the real economy?

If all three indicators weaken together, that would suggest high rates are affecting the real economy through the credit channel, with inflationary pressure likely to ease further.

If all three remain resilient—borrowing demand has not cooled significantly, banks' profit margins have not narrowed substantially, and credit risk has not deteriorated materially—the effects of high rates have yet to be fully felt. The Federal Reserve would still have room to maintain high rates and restrain demand.

Tonight, watch whether shares in the leading banks and the 10-year Treasury yield continue to rise. These two indicators directly reflect markets' judgement of the earnings results and investors' expectations for Federal Reserve policy. The results will also provide an important reference point for assessing how high interest rates affect inflation.