Banking Industry: Sicker, More Concentrated

By James Kwak

The rapid bounce-back of some of the big banks (notably Goldman and JPMorgan) has overshadowed (at least on the front pages of major newspapers) the continued plight of the banking sector as a whole. Calculated Risk highlights the FDIC’s Quarterly Banking Profile, which lists 702 problem banks with over $400 billion in assets — the highest year-end figures on both metrics since 1992, as the savings and loan crisis was tailing off.

A few other summary points from the report:

  • Profits are small — actually, nonexistent except at larger banks: “The average return on assets (ROA) for all four of the asset size groups featured in the Quarterly Banking Profile was better than a year ago, although only the largest size group—institutions with more than $10 billion in assets—had a positive average ROA for the quarter.”
  • Bank balance sheets continue to get worse, with net charge-offs increasing for the twelfth consecutive quarter.
  • Lending continues to fall: “Total loan and lease balances declined for the sixth consecutive quarter in a row.” Total bank balance sheets fell by 5.3 percent — “the largest percentage decline in a year since the inception of the FDIC.”
  • Concentration is increasing, with 319 banks vanishing due to mergers or failure in 2009.

See also the Washington Post article, where Sheila Bair blames the large banks: “Bair said that the vast majority of the decline was the result of lending cutbacks by the largest banks, which have tightened qualification standards and increased the proportion of money that they hold in reserve against unexpected losses.”

Undoubtedly many small banks are cutting back on lending because losses are eating into their capital and forcing them to contract. But I think what frustrates Bair is that the larger banks — which are more profitable (in part by charging higher fees) and which enjoyed more government support — are also cutting back.

19 thoughts on “Banking Industry: Sicker, More Concentrated

  1. Who needs small banks, small businesses, or employees?

    It’s mega-corp profits that make America strong!

    Dow 36000 baby

  2. 1. There is something strange about criticizing banks for being risk averse, although in this context it makes sense.

    2. 319 vanishing banks out of what, 8000-9000? By any measure of concentration, because one of them were big national institutions, that is nothing.

  3. Agreed – “sicker, more concentrated”

    Are we surprised? No.

    I really don’t know what to say…there is so much wrong with the banking, politcal, and economic systems.

    Example: February 18 – Bloomberg (Ryan J. Donmoyer): “The 400 highest-earning U.S. households reported an average of $345 million in income in 2007, up 31% from a year earlier, IRS statistics show. The average tax rate for the households fell to the lowest in almost 20 years… Each household in the top 400 of earners paid an average tax rate of 16.6%, the lowest since the agency began tracking the data in 1992…”

    In the meantime, there has been NO significant reform of any kind…certainly NONE in the public interest.

    This Depression is going to get worse.

  4. James Kwak “But I think what frustrates Bair is that the larger banks — which are more profitable and which enjoyed more government support — are also cutting back.”

    If she is frustrated by that then she does not know enough about banking regulations. If she did she would know that the down-grading of their assets is increasing the capital requirements of the banks tremendously, without them having to put one single new asset on their books for that… and since bank equity is expensive and scarce… they have to cut back.

  5. Let’s hear it for the wildly successful oligarchs of finance!! They are driving everyone but themselves south in profitability because they continue to eat at the public trough, although it appears that the Fed has decided that maybe it’s time to bring a little (very little) perspective by raising the base rate just a bit. It won’t be enough for the big guys though, since they are still deep into leveraging, except when it comes to lending, where they have both tightened and raised reserves. Now, it’s just about keeping up the earnings, which should continue to be no problem although a little tightening of the credit card standards may pull them back just a bit.

  6. So what’s the solution to this banking problem? Simple, but not easy. Neither was settling this country or storming Normandy Beach. It’s just something else we need to do.

    Get rid of the Fed.

    Open 50 State Banks.

    North Dakota, the only state with a state bank (opened in 1919) does not have a failed bank on the FDIC list that started in Oct. 2000. It also has a budget surplus of around $1 billion.

    ND also has the lowest unemployment in the country, no housing problem & no large bank exposure or branches. Just local banks & the state bank.

    This compares with our central bank’s (Fed) balance sheet which is over $2 trillion of which over $1.5 trillion is loans of which over $500 billion is national debt. Another $367 billion is MBS. This is our money they’re lending to the big insolvent banks & Freddie & Fannie to buy up their bad loans. And congress.

    The Fed just ain’t cutting it.

  7. Big banks have higher fees AND lower rates. They can charge more because of market dominance. All true even absent the federal subsidy that lowers borrowing costs. This looks like a classic opportunity for anti-trust action — no new legislation or legal authority required. But it takes the ball away from the Summers-Geithner-Bernanke team and hands it off to Holder. Will Coach Obama make that call?

  8. bank lending continues to contract as a part of the necessary deleveraging process. I’m not sure what you are implying in your last sentence.

  9. Where is the listing of these 702 troubled banks? There is no listing at all in the 27 page FDIC Quart Bank Profile. We should be able to see who these banks are.

  10. Rickk, what unsecured was looking for is this:

    This is the UNOFFICIAL list of troubled banks put together by Calculated Risk on a weekly basis with the help of some surferdude contributor. The FDIC has a policy of not disclosing which the problem banks are, but CR and his friend found public sources listing those banks from where to compile the data. This list has usually led to accurate forecasts of bank failures, including some big ones. At the time this list was last compiled (last week) there were only 605 banks in the list, so the officla FDIC count has 103 more banks that we still have to identify.

    Now, this list is really very incomplete as it is missing, due to technicalities, the really sicker and insolvent banks like BofA, Citibank, JPMorgan Chase, Goldman Sachs, probably Wells Fargo too, etc etc which should be part of any list of problem financial institutions.

    You are welcome.

  11. Put the money back in the banks. Make it punitive to own money market investments outside of a regulated depository. Put the loans back in the banks. Disintermediation of last 30 years has resulted in 95% of banks (say 7500 out of 8000)being adversely selected – chasing poorly underwritten loans to homebuilders and real estate developers. All the “good” residential loans went to Fannie and Freddie, all the good auto loans and credit card loans went to big banks and securitization vehicles. The 95% group couldn’t make spreads work on these “good” loans. We need to get these “good” loans back onto the balance sheets of the 95% crowd. Of course they need funding and capital to support these loans. If the feds were to subsidize current rates on loans in Fannie/Freddie portfolio (say 100 bps) and sell them to 95% crowd according to mutual zipcodes, this might be a low cost way of shutting down Fannie/Freddie. Rate subsidy on new originations goes away over time, slowly. Better net interest margins as a result of rate subsidy and deposits flowing into banks as a result of punishing non-depository money market funds will attract more capital to banking sector. Our shadow banking system (i.e. asset-backed securities and money funds that buy them)has given us adverse selection in our regulated banking sector (at least for the 95% crowd). Today, we find ourselves at the most opportune time for the 95% crowd to be adversely selected and yet the regulators and politicians urge the banks to lend. (Go ahead Mr. Community Bank and refinance that poor sap who took his business to a CMBS in order to save 50 bps! You’re being patriotic!) The 95% crowd needs money (deposits and capital) and they need good lending opportunities at reasonable spreads. Let’s end the adverse selection -get the money market funds back into the banks and let’s get the good loans out of the feds’ portfolios and out of the securitization vehicles.

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