Banks Leading The Economy Off The Cliff!

It's awfully hard to like banks.  Let's face it:  they charge us absurd rates on credit cards, are unwilling to lend to even the best of credits and pay themselves ever so handsomely despite being at the forefront of the economic debacle known as 2008-2009.  Leading bankers themselves are smug, out-of-touch with America and in cahoots with the Administration.  It's hard not to want to see them fail miserably!

Unfortunately, we NEED healthy banks.  We NEED good banks.  No economy can prosper without a healthy financial sector.  And sadly, we don't have one.  In fact, the banking sector is quietly deteriorating further despite all the machinations of the Federal Reserve (FED).  The trend is downright alarming AND ominous!

The number of problem banks in the US continued to soar in last year’s fourth quarter, hitting their highest level since 1993, according to a regulatory report released on Tuesday(http://www.ft.com/cms/s/0/334b89dc-2097-11df-9775-00144feab49a.html).

The findings by the Federal Deposit Insurance Corp. (FDIC) suggest that, although the US economy is on the mend, the financial industry, bedevilled by souring residential and commercial real estate loans, will take longer to recover.

The FDIC said 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled $402.8 bilion in the final period, compared with $345.9 billion in the third quarter.  By contrast, Lehman Brothers listed $639 billion in assets at the time of its bankruptcy filing in September 2008.

No longer confined to Wall Street, the financial crisis has cascaded over to regional and community banks that are feeling a disproportionate amount of the pain.  “The great recession has very much become a Main Street problem,” said Richard Brown, the FDIC’s chief economist.

Loan losses jumped for the 12th consecutive quarter to total $53 billion, an increase of 37% over the year-ago period.  On an annualized basis the rate of losses accounted for in the quarter was the highest in more than two decades.

Losses rose in all significant categories, including residential mortgage loans and credit card debt.  One of the fastest growing categories for uncollectable debt was commercial real estate.

Bank lending, the lifeblood of the U.S. economy, is falling at a record pace.  U.S. banks  last year posted their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover  (http://online.wsj.com/article/SB10001424052748704188104575083332005461558.html?mod=djemTEW_h).

While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the FDIC.  Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.

Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702.  More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data has been collected!  And the problems are expected to last through 2010!

The struggling U.S. banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years.  Banking groups and their members counter that they're under pressure from regulators to be more prudent and that demand from struggling consumers and businesses isn't there.

Some small-business owners say they could expand if they could just get a loan.  Nick Sachs, president of Homewatch CareGivers Cincinnati-Metro, says he's been asking banks for a loan of $150,000 to $250,000 since 2008.  He says his home-health-care franchise could hire 20 to 30 aides and even one or two office assistants.

Most surveys suggest a combination of factors are at play.  A January survey by the FED of senior loan officers showed banks have slowed their efforts to tighten lending standards, but have not backed off the more stringent loan terms they put in place over the past two years.  The same report, however, also showed that demand for loans from businesses and consumers continues to fall.

Bankers, on the other hand, say creditworthy borrowers are hard to come by.  Fifth Third Bancorp recently extended a $3.5 million line of credit to Chicago-based One Hope United after the state of Illinois, beset by a budget crisis, delayed payments to the child-and-family-services provider.

Clearly, we have a so-called "vicious circle" problem.   The poor condition of borrowers coupled with the poor condition of the economy are making it tougher for banks to lend.  The unwillingness of banks to lend, on the other hand, is contributing to the poor economy and resulting poor credit-worthiness of potential borrowers.  Sadly, before anyone in Washington, D. C., figures this out, we'll be well on our way into the Second Dip of the Double-Dip Hyper-Inflationary Depression.

Disagree?  Think I'm being unfair to Bankers?  TAKE ME ON!

Marko's Take

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