Major banks reported huge drops in profit as they begin stockpiling cash in anticipation of a wave of loan losses as the pandemic continues.

Citigroup, Wells Fargo, and JPMorgan Chase reported drops in quarterly profits of 73 percent, 18 percent, and roughly 50 percent, respectively. While some of these losses can be directly attributed to drops in revenue, most had to do with the banks setting aside billions of dollars in cash, as they expect large numbers of loans to default, said the Wall Street Journal. The three banks have stockpiled a combined $28 billion in anticipation of this possibility, indicating that they believe that the scope and scale of the pandemic's economic damage will be greater than initially thought, especially considering the winding down of certain government aid programs.

Banks are not the only entities seeing a rising risk of loan defaults. A recent Moody's report said that the global default rate on speculative-grade debt reached 5.4 percent at the end of June, up from 4.8 percent the previous month and 2.4 percent the previous year, bringing the statistic to its highest point in a decade. Already, the number of defaults among corporate issuers tracked by Moody's for the first half of the year, 111, is greater than the total number of all of last year, 105.

S&P, meanwhile, is reporting that, in the second quarter alone, some $23 billion worth of leveraged loans defaulted, breaking the record previously set in 2009. It said that more were likely to follow, as June saw that 35 percent of the loan market (by par amount outstanding at the facility level) had received ratings downgrades representing $411.1 billion of the $1.169 trillion worth of rated loans that were around at the end of 2019. A further challenge, according to the Wall Street Journal, is that the pandemic is skewing the data that banks typically rely on to assess creditworthiness. That's because the CARES Act forbids lenders that allow borrowers to defer their debt payments from reporting these payments as late to credit-reporting companies. Given the size of reserves for loan losses, banks seem to be reacting to this ambiguity with an assumption that lots of borrowers are probably bigger credit risks than they may at first appear.