Interest Rate Roundup

Thursday, May 29, 2008

FDIC: Banking industry a mess in Q1 2008

The latest report on the state of the nation's banking industry was just released by the Federal Deposit Insurance Corporation. Things weren't pretty in Q1 2008. In fact, I'm inclined to describe the U.S. financial industry as "a mess" -- to use a technical term.

Here's an excerpt from the FDIC's release this morning:

"Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $19.3 billion in the first quarter of 2008, a decline of $16.3 billion (45.7 percent) from the $35.6 billion that the industry earned in the first quarter of 2007. In releasing the latest results, the FDIC cited higher provisions for loan losses as the primary reason for the drop in industry profits. The size of the earnings decline was mainly attributable to a few large institutions, but more than half of all insured institutions (50.4 percent) reported lower net income in the first quarter.

"To sum up, while we may be past the worst of the turmoil in financial markets, we're still in the early stages of the traditional credit stress you typically see during an economic downturn," said FDIC Chairman Sheila C. Bair.

"She went on to say that "given the weaker economy and rising level of problem loans, we're encouraging bank managers to stay on their toes. We're urging all institutions to make sure their reserves are large enough to cover expected losses. We also want them to beef up their capital cushions beyond regulatory minimums given uncertainties about the housing markets and the economy."

A few other interesting, and troubling, tidbits (my emphasis added):

* Loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $26 billion (or 24 percent) to $136 billion during the first quarter. That followed a $27 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans in the first quarter consisted of real estate loans, but noncurrent levels increased in all major loan categories. At the end of the first quarter, 1.7 percent of the industry's loans and leases were noncurrent.

* Earnings remain burdened by high provisions for loan losses. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled $37.1 billion, more than four times the $9.2 billion the industry set aside in the first quarter of 2007. Almost a quarter of the industry's net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

* The industry's "coverage" ratio -- its loss reserves as a percentage of nonperforming loans -- continued to erode. Loan-loss reserves increased by $18.5 billion (18.1 percent), the largest quarterly increase in more than 20 years, but the larger increase in noncurrent loans meant that the coverage ratio fell from 93 cents in reserves for every $1.00 of noncurrent loans to 89 cents, the lowest level since 1993. "This is a worrisome trend," Chairman Bair said. "It's the kind of thing that gives regulators heartburn."

The complete Quarterly Banking Profile is available as a large PDF document here. If you read it, you'll also stumble across this note:

"The number of institutions on the FDIC’s “Problem List” increased from 76 to 90 in the first quarter. Total assets of “problem” institutions rose from $22.2 billion to $26.3 billion. This is the sixth consecutive quarter that the number of “problem” institutions has increased, from a historic low of 47 institutions at the end of third quarter 2006. The current level represents the largest number of institutions on the list since third quarter 2004, when there were 95 “problem” institutions."


  • Mike, love the blog you and others of the Weiss team have.

    Have a question concerning demographics. I remember that Dr. Weiss has written about the retiring baby boom generation and how this is going to place tremendous stress on our economy.

    There are others that have written about this problem. In the past I was a big follower of Harry Dent Jr, a demographic economist. If not familiar, he has written a series of books about the influence generations have on the economy.

    Harry was predicting the housing slow down and the resulting financial mess it would place us in several years before it occurred. I believe his prediction of when it would occur was off by about a year.

    My question is, how much do you think demographics played a part in the housing / credit mess verses low interest rates creating a bubble along with risky loans & borrowing? I guess my question really is was Harry Dent lucky or is there something to demographic economics?


    By Anonymous Anonymous, at June 2, 2008 at 8:44 AM  

  • Thanks for your interest. Unfortunately, I am not familiar enough with Mr. Dent's work to evaluate whether or not he is on to something. My general belief with regards to housing, however, is that low interest rates, easy lending, and speculation were the primary contributors to the bubble.

    By Blogger Mike Larson, at June 2, 2008 at 10:54 AM  

  • Great post, great blog. Thank you.

    By Anonymous Anonymous, at June 9, 2008 at 1:21 PM  

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