Banks’ net chargeoffs headed back to normal

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NET CHARGEOFFS ON THE RISE: Banks will begin to discuss their second-quarter earnings this week, and those listening to the related conference calls are going to get their fill of hearing the phrase “credit normalization.” One of the distortions caused by the pandemic was the record-low level of net chargeoffs at banks last year.

Net chargeoffs rose in the first quarter and I expect that will be the case for not just second-quarter earnings, but for several more to follow. One historical correlation that supports this conclusion is the level of bankruptcy filings, which have been rising and have been a leading indicator of net chargeoffs.