Although the recession has technically ended and the financial markets have stabilized, that does not necessarily mean the banks are out of the woods just yet.
The banking industry is now facing the next wave in the storm, souring and past-due loans, which the Federal Deposit Insurance Corp. said have reached the highest levels in 26 years. FDIC Chairman Sheila Bair said: “While bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance.”
The FDIC maintains a ‘problem list’ to track banks with troublesome loan portfolios. On June 30, that list rose from 416 to 552, the highest level in 16 years. Along with this, we saw fifty banks fail during the third quarter, which was the largest number of failures since the second quarter of 1990. So, although Banks earned $2.8 Billion in the third quarter, roughly 40 percent of that was from one-time changes in accounting principles.
The Thrift Institutions likely have a larger exposure to potential bad loans, as they are required by law to have at least 65% of their lending in mortgages and other consumer loans. In a period of rising unemployment and the housing downturn, the Thrifts are left quite vulnerable.
With the rising number of bank failures, and the chests of FDIC becoming bare, the agency has decided this month to require banks to prepay three years of deposit insurance premiums by the end of next month, which will rise about $45 billion. However, the forecast for bank failures through 2013 forecast exposure of $100 billion, so this prepayment will not provide a long-term fix for the fund.
“There is no question that credit availability is an important issue for the economic recovery,” Bair said. “We need to see banks making more loans to their business customers.” As big banks are borrowing from the Fed at record low interest rates, they are apprehensive to lend due to these rising loan losses. But, there is a benefit anyway – the spread that banks earn on their loans will improve, which will enable them to spend differently, in other areas.
