Banking Glass Half Empty With Red Ink

Last quarter was tough on banks.  All the details are in the FDIC’s Quarterly Banking Profile.  Here are some highlights:

Loan loss provisions and goodwill write-downs were the problems.  Four institutions accounted for half of the total loss, though 32 percent of institutions had a loss.

Regulatory capital increased by a little.  The problem isn’t so much that banks don’t have capital anymore, it’s that the front-line regulators want them to have even more capital (in contrast to what the muckety mucks in Washington say).  I’ve commented on this before.

Most banks are healthy, meeting the highest capital standards.  By “most” I mean 98.7% of them.

How bad are those loan problems?  Here’s a look:

Note that I’m only showing commercial and industrial loans.  You can see the data for consumer and real estate loans at the Fed’s web site.

For those of you who aren’t bankers, here’s what the terms mean:  “default” means that the borrower is not in compliance with all the terms of the loan.  The loan may be paid off, maybe even in full, but right now there’s a payment late or a loan covenant broken.  “Charge off” means that the bank’s financial statements assume a loss.  The charge off may be for some percentage of the loan amount, reflecting the bank’s expected recovery.  (You charge off $30 on a $100 loan if you expect a 70% recovery.)  The charge off does not necessarily reduce earnings, because the bank may previously made a loan loss provision to reflect the possibility of the charge off.  Charge offs in excess of the related provision hurt earnings.  Last quarter, the provision exceeded the actual losses, meaning that banks are pessimistic about the future.

My conclusion: right now this is bad, but not terribly out of line with past bads.

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