If you think back to the early days of the COVID-19 pandemic, a few things probably come to mind: masks, bans, bleach wipes, and of course, loan default reserves (LLRs).

OK, so maybe LLRs weren’t part of your personal pandemic preparedness, but they certainly were for big US banks, which set aside billions of dollars in 2020 to brace for possible defaults on outstanding loans after businesses ground to a halt because of COVID-19 .

As the financial sector’s Q3 2022 reporting season begins, 2020 is again in the shadows. With interest rates at multi-year highs thanks to a tightening Federal Reserve trying to tame inflation, there are concerns that borrowers may struggle again to repay their debts.

Do big banks have to expand their reserves to protect their own health?

That’s just a question as the largest US banks prepare to report later this week and early next week. Such reserves could eat away at their bottom line if they go down this route. But there are other questions too, including:

• What was the lending volume in Q3 and what are the banks’ forecasts for lending volume in Q4 and beyond?

• How has asset volatility in currencies, interest rates and stocks evolved over the past three months?

• Do banks see liquidity shortfalls that could be problematic?

• What is the credit rating today?

How banks approach these issues and their own earnings results is likely to influence Wall Street. Her narrative should set the tone across industries for the remainder of the Q3 earnings season.

Prepare for the worst

LLRs aren’t one of the things investors want to hear about when it comes to the banking sector because they hit profits directly. According to Banking Dive, a banking industry news outlet, bank profits fell 22.2%, or $17 billion, between the first quarter of 2021 and 2022. Banks have accumulated reserves during the pandemic. But thanks in part to the Fed and Congress providing a pandemic lifeboat…