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A ‘bloodbath' predicted when lenders return to writing down bad loans

BY JOE TYRRELL

NEWJERSEYNEWSROOM.COM

The latest numbers show widening gaps in the health of the nation's banking system, with major institution racking up profits, some fueled by taxpayer bailouts, while many smaller banks struggle to stay afloat.

Overall, the industry bounced back from earlier losses to post a $2.8 billion profit in the third quarter, the Federal Deposit Insurance Corp. said in a Nov. 24 report.

But the nation's 112 largest banks, those with more than $10 billion in assets, made total profits of $4.7 billion. The 7,408 smallest banks, those with assets of less than $1 billion, roughly broke even. The picture was gloomier for the 579 medium-sized banks, which lost an average of $3 million.

Taxpayer bailouts of banks did not translate into more loans to consumers. Total loans and leases dropped $210.4 billion, or 2.8 percent, in the quarter, according to the FDIC. That was "the largest percentage decline in loan balances in any quarter since insured institutions began reporting quarterly results in 1984," the agency reported.

"There is no question that credit availability is an important issue for the economic recovery," FDIC Chairwoman Sheila Blair said in a statement. "We need to see banks making more loans to their business customers. This is especially true for small businesses."

Instead, loans to commercial and industrial borrowers were down 6.5 percent; real estate construction and development loans 8.1 percent, and residential mortgage balances dropped 4.2 percent.

Another 50 banks failed during the quarter, and the agency estimates one in 15 are in danger of collapse. Even at that, some analysts believe major banks are prettifying their balance sheets for federal regulators overseeing the bailout.

Many institutions aggressively cut costs to improve their profits to avoid the need to raise more money to satisfy their solvency requirements during "stress tests" conducted for the bailout, Christopher Whalen of Institutional Risk Analytics told the Huffington Post. He predicted "a bloodbath" as they return to aggressively writing down loans.

The consequences of banks' inability or unwillingness to make loans were reflected in two separate economic reports by the Federal Reserve, also released Nov. 24. The central bank downgraded its evaluation of economic growth in the third quarter to a 2.8 percent annual rate, compared to its previous 3.5 percent annual estimate.

The Fed also acknowledged that under current conditions, unemployment is likely to remain higher than normal for years.

By the end of 2012, the Fed's forecasters expect official unemployment — not counting discouraged workers no longer seeking jobs — to be 6.8 to 7.5 percent. That's below October's 10.2 percent level, but still above the 5 percent considered healthy.

In stilted language, the central bankers projected "that about five or six years would be needed for the economy to converge fully to a longer run path."

There was some shorter-term good news from the Fed officials, who fractionally increases their projections of economic growth during the coming year. They increased the anticipated growth rate for Gross Domestic Product to 2.5 to 3.5 percent during 2010. With that in mind, they expect unemployment to drop to 9.3 to 9.7 percent next year.

The FDIC report can be viewed HERE (PDF).

For more on the Federal Reserve's economic projections, see the Nov. 3-4 minutes of the Federal Open Market Committee at its website: www.federalreserve.gov

Joe Tyrrell may be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it