FDIC Signal Bank Industry Improvement, Hiding Scars

The FDIC Quarterly Banking Profit reports that industry net income rose to a two-year high of $18 billion. While that seems like a large number, it is spread across almost 8,000 banks. The figure is well up from less than $5 billion in the same period last year.

The agency’s carefully watched “problem bank” list rose to 775 from 708 last quarter. But, that hardly mattered. The asset exposure of those banks rose from $403 billion to $431 billion, a small increase compared with the inexorable rise in 2008 and 2009. The report did not say how many banks might fail this year, but the pace is toward 200.It appears that the $45 billion that the FDIC raised last year by getting banks to prepay their deposit insurance through 2012 may be adequate. If it is not, the agency will have to turn to the Treasury, which would  mean a bailout by US taxpayers. And, there is still a very real prospect of that based on a careful evaluation of the FDIC report.

Net interest income totaled $109.1 billion in the first quarter, a $9.7 billion  increase from first quarter of 2009. “Most of this increase reflected the application of the new accounting rules,” the FDIC reported.  The quarterly evaluation added “Industry assets increased for the first time since fourth quarter 2008, and total loan and lease balances rose for the first time since second quarter 2008, but only because of the new accounting rules.”

The most troubling part of the report is that most of the improvements across the industry were due to the advances in earnings and balance sheet improvements were at large commercial banks. Mid-tier and community banks were largely left behind. And the deep trouble with the financial system still resides at the bottom end of the sector where the exposure to consumer credit and commercial real estate mortgages remains unusually high. The part of the industry that the FDIC calls “savings banks” still hold a disproportionate number of these loans based on outstanding balances.

There is still a huge pool of troubled loans sitting on the balance sheet of banks that the government did not bail out and the failure of many of those loans continues to haunt the FDIC.

Douglas A. McIntyre