Dialing Down Debt: Road to Recovery Begins at Home via Real Estate Center at Texas A&M University

It is time for an honest discussion about household debt levels in the United States. How much debt are households carrying? Will they be able to pay it back? What happens if they can’t? How will it impact banks?

Bank expectations of future losses are reflected in the level of loan loss provisions made on their financial statements. Banks have so aggressively released loan loss reserves in the past year that the positive impact on earnings has covered the weakness from revenue declines caused by falling loan balances. The FDIC’s Quarterly Banking Profile for first quarter 2011 reports banks reduced loss reserves by $30.9 billion, or nearly 60 percent, in the prior 12 months. Total provisions for losses are now at $20.7 billion, the lowest level since third quarter 2007. Current household debt is very high by historical standards. Do banks really think households will successfully pay down their current debts? If households can’t pay, is $20.7 billion enough to absorb all the losses that might occur?

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