Banks Still Are Failing, But Not Like Before

by Dan Burrows | May 25, 2012 12:36 pm

[1]It’s been nearly four years since the collapse of Lehman Brothers sparked a global financial crisis, and banks are still going belly up at an historically high rate.

But their failure rate is getting better — much better.

The industry’s earnings have grown for 11 straight quarters, according to the Federal Deposit Insurance Corp.[2], and the number of bank failures and teetering institutions is running at a fraction of the peak carnage logged in 2010.

“The condition of the industry continues to gradually improve,” said Martin Gruenberg, the FDIC’s acting chairman, in a new report. “Insured institutions have made steady progress in shedding bad loans, bolstering net worth, and increasing profitability.”

First-quarter loss provisions totaled $14.3 billion, almost one-third less than the $20.9 billion that insured institutions set aside for losses in the first quarter of 2011, the FDIC said. Moreover, the quality of assets on banks’ balance sheets continues to improve. FDIC-insured banks and thrifts charged off $21.8 billion in uncollectible loans during the first quarter, down $11.7 billion, or almost 35%, from the same quarter a year ago.

At the same time, although the number of loans and leases at least 90 days past due remains high by historical standards, the amount did decline for an eighth straight quarter.

And banks are becoming more profitable, too. More than 67% posted gains in quarterly net income compared with a year ago, while the share of banks reporting net losses for the first quarter fell to a bit more than 10% from nearly 16% in the prior-year period.

Happily, the incidence of banks getting into serious trouble has also dropped dramatically. The number of “problem” institutions declined to 772 from 813 in the first quarter, the FDIC said. That’s the smallest number of “problem” banks since the end of 2009. Meanwhile, total assets of “problem” institutions declined to $292 billion from $319 billion.

Perhaps best of all, although 16 banks failed during the first quarter, that was the smallest number for a quarter since the last end 2008, when there were 12.

More broadly, the Federal Reserve’s March stress tests demonstrated that the nation’s largest, most systemically important financial firms appear to have enough capital to withstand another extraordinary shock to the system.

So, although banks are still failing at an historically high rate, the trend is their friend. According to the FDIC, 24 banks have failed so far in 2012. By comparison, by this time last year 43 banks had gone bust.

Should the current rate of failures continue, about 66 banks will fail this year — an appalling figure, but far bettter than what we’ve become accustomed to.

Here’s a look at bank failures by year through the last two market crashes and recessions:

2011: 92 bank failures
2010: 157 bank failures
2009: 140 bank failures
2008: 25 bank failures
2007: 3 bank failures
2006: 0 bank failures
2005: 0 bank failures
2004: 4 bank failures
2003: 3 bank failures
2002: 11 bank failures
2001: 4 bank failures
2000: 2 bank failures

Now for the bad news. In a sign of a sluggish economy, the industry’s loan balances dropped almost 1%, or by $56.3 billion, in the first three months of the year. That broke a streak of three straight quarters of loan-balance growth.

True, one quarter does not make a trend, and the FDIC said we should be cautious in drawing conclusions from a single three-month period. But if the economy substantially weakens, lending stalls and bad loans start picking up steam, the rate of bank failures will likely rise.

“Indicators of financial strength and asset quality continued to improve in the first quarter, but the process of recovery is clearly still ongoing,” Gruenberg said. “The improved financial condition of the industry has not yet translated into sustained loan growth. We will continue to watch this indicator closely.”

We’ve come a long way since the darkest days of 2009 and 2010. Things are still bad, but they’re getting better.

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  2. Federal Deposit Insurance Corp.:

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