Wednesday, May 25, 2011

Bank Profits Are Highest Since Early 2007

From the FDIC's Quarterly Banking Profile:

"Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $29 billion in the first quarter of 2011, an $11.6 billion improvement (66.5 percent) from the $17.4 billion in net income the industry reported in the first quarter of 2010. This is the seventh consecutive quarter that earnings registered a year-over-year increase. For the sixth consecutive quarter, reduced provisions for loan losses drove the improvement in earnings.  Net income was the best for the industry since the $36.8 billion earned in the second quarter of 2007 (see chart above).

"The industry shows continuing signs of improvement," said FDIC Chairman Sheila C. Bair. She added, "though there is a limit to how far reductions in loan-loss provisions can boost industry earnings."

More than half of all institutions (56 percent) reported better quarterly net income from a year ago, and only 15 percent had a net loss for the quarter. The average return on assets (ROA), a basic yardstick of profitability, rose to 0.87 percent from 0.53 percent a year ago.


The number of institutions on the "Problem List" flattened. The net increase of four, to 888, is the smallest in three-and-a-half years. The number of "problem" institutions is the highest since March 31, 1993, when there were 928. Total assets of "problem" institutions increased from $390 billion to $397 billion. Twenty-six insured institutions failed during the first quarter, the smallest number in the last seven quarters."

MP: Despite the strong rebound in bank profits to pre-recession levels, there was a 3.2% annual decline in bank revenues in the first quarter and an accompanying decline in loan balances, suggesting that bank credit availability is still lagging (see Washington Post story here).  But the fact that bank profits have fully recovered to early 2007 levels is another sign that the worst of the financial crisis is far behind us, and the U.S. banking system is once again healthy and profitable.

28 Comments:

At 5/25/2011 8:51 AM, Blogger morganovich said...

"the U.S. banking system is once again healthy and profitable. "

yet problem banks are at a near record level.

i'm not sure that this is so much a sign of systemic health as it is a sign of large banks recovering, small ones still suffering, and an incredibly low cost of capital boosting earnings.

a healthy banking sector does not need a ZIRP to keep it on its feet.

in 2007, banks were borrowing at 4%. now it's 50bp (if that). if we had 2007's rates, they wpuld all be basket cases.

this makes me thing that we do not have "healthy" banks, but rather very heavily supported ones.

healthy banks can prosper in a normal interest rate environment. these banks cannot.

they are borrowing short and lending long. this is going to be very bad news when rates rise.

 
At 5/25/2011 10:26 AM, Blogger Cash212 said...

Profits reflect a combination of recovery, Fed/Treasury/FDIC subsidy, and a large dose of accounting trickery.

Why are you such a cheer-leading shill? I would just tune you out but, when you're not cheer-leading, you make so many fantastic posts.

Why not be partial and cover the bad durable goods news (like you would do if it were good news)?: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

 
At 5/25/2011 11:12 AM, Blogger Benjamin said...

Greg Mankiw says rates could go lower, and Robert Mundell is predicting deflation when QE3 ends. So banks may enjoy even lower borrowing costs for many more years, and I think they will.

Bernanke is not being aggressive enough. The USA may be developing a case of Nipponitis.

Mild deflation, perma-weak growth.

I hope not, but if Bernanke is cowed by the GOP-gold-nut mau-mauing, anything is possible...

 
At 5/25/2011 11:21 AM, Blogger morganovich said...

"Greg Mankiw says rates could go lower"

the current target is 0-25bp.

how do you go lower than zero?

if he's talking about mortgage rates, then that's BAD for banks.

 
At 5/25/2011 11:27 AM, Blogger Rufus II said...

Wake me when they start putting the thieves in jail.

 
At 5/25/2011 11:50 AM, Blogger Methinks said...

how do you go lower than zero?

You know enough theory to know that this is theoretically possible, Morganovich.


healthy banks can prosper in a normal interest rate environment. these banks cannot.

And there-in lies the problem. When you subsidize something, it will...uh..."prosper". In a recent NYT column, Krugman was patting Obama on the back for bailing out the dead car industry and for the return (as if it went anywhere) of U.S. manufacturing (much of it heavily subsidized).

The banking industry - indeed, the whole financial sector - is more fragile today than it was in 2007. Distracting people with measures of fake profit doesn't change the underlying reality.

 
At 5/25/2011 11:58 AM, Blogger Benjamin said...

Methinks:

How is US manufacturing subsidized? Did you mean "agriculture?"

There is no more subsidized, mollycoddled, regulated, knock-kneed enfeebled enterprise than agriculture, and rural economies.

Truth be told, the federal government has been sucking money out of urban areas, and pumping it into rural areas, since the FDR-LBJ gravy train got rolling, and the lard-flow has only grown every year since.

Dr. Perry someday might want to look at how much Detroit, in its heyday, sent to DC never to be returned--but spent in Backwater-Loserville, USA.

 
At 5/25/2011 1:04 PM, Blogger James said...

How could banks not be profitable? They borrow money from the government at less than 1 percent and buy governments bonds paying 3 percent. They were supposed to loan that money to private enterprises to grow the economy but Congress did not put such a restriction in the bill loaning the money. Another example of the taxpayers being taken to the cleaners because congress votes on legislation without bothering to even read it much less understand it.

Bank profits are little help to the rest of the economy. Our government seems to have given up on producing jobs with its own actions and is waiting for a Deus ex machina solution.

 
At 5/25/2011 1:05 PM, Blogger Methinks said...

There is no more subsidized, mollycoddled, regulated, knock-kneed enfeebled enterprise than agriculture, and rural economies.

So what? Subsidizing failure - whether rural or urban, cars or corn - is a disaster.

 
At 5/25/2011 1:14 PM, Blogger Benjamin said...

Methinks:

The "so what' is this: While there may be a popular image of urban areas being subsidized by the federal government, the opposite is true: The Red State Socialist Empire is heavily subsidized by federal taxpayers. A state like Kentucky, per capita, receives a net $4000 per capita from the federal government every year, and all other rural states are also on the lard bus.

That means all the blabber from rural Senators and Congressman about "balancing the budget" is just pettifogging, posturing and sermonettes.

Urban states, such as California,pay more to the federal government every year than they receive back.

 
At 5/25/2011 2:07 PM, Blogger Methinks said...

Benji,

What part of "all subsidies are bad" do you find confusing?

 
At 5/25/2011 2:15 PM, Blogger Methinks said...

James,

Do you honestly believe that if congressclowns read and understood the legislation they were passing, there would be less bad legislation? I don't think reading the legislation changes their political incentives. Focusing on whether they read the legislation or not is just a distraction.

BTW, one of the reasons lending has not been so healthy is because the Fed came out with new restrictions on lending at the same time that it was printing money. Ahhh....ain't central planning awesome?

As for jobs, the congress can produce all the jobs in the world. All we need to do is go to war. Hell, we can just clear out and bomb some of our own cities and everyone can be employed rebuilding them. Jobs are easy to create. Prosperity is the difficult thing to create and government has never and can never do that.

 
At 5/25/2011 3:55 PM, Blogger Benjamin said...

Methinks-

If you keep agreeing with me, this argument could go on forever.

 
At 5/25/2011 5:36 PM, Blogger VangelV said...

What nonsense. The banks are only profitable because they can get the Fed to buy some of their under-performing and avoid writing down the rest by not recognizing its true market value. The US banking system is in big trouble and one double dip from disaster.

 
At 5/25/2011 5:48 PM, Blogger Rick Caird said...

If Benji is so concerned about states getting back less than they send to Washington, he should:

1. Advocate for a flat income tax or, better, a per capita tax.

2. Eliminate the middle man and stop having the feds collect taxes that will be returned.

 
At 5/25/2011 6:27 PM, Blogger Benjamin said...

Rick-

I would settle for a flat consumption tax.

A national sales tax of 15 percent, and drop all other taxes.

Perhaps exempt food and medical services.

 
At 5/25/2011 9:20 PM, Blogger morganovich said...

"You know enough theory to know that this is theoretically possible, Morganovich."

do you honestly believe that the fed will start paying people to take money?

if free money is not enough to fix the problem, then the price of money is not the issue.

also, having negative interest rates is incredibly expensive.

negative nominal interest rates have only ever existed in theory for a reason.

they accomplish nothing that zero interest rates don't already do but have a ruinous price tag.

 
At 5/25/2011 11:07 PM, Blogger Methinks said...

Morganovich,

You didn't ask how low are they likely to go, you asked how much lower can they go. Surely, you know that interest rates are not bound by zero the way that stocks are.

I understand the issue of practical constraints outside of theory that reduce the probability. But, just because the probability is very low doesn't mean that outcome is suddenly eliminated from the probability distribution. I don't expect it to happen, but I know it can.

Not only can nominal interest rates go negative, but T-bill rates were negative for a few days not so long ago. You remember?


they accomplish nothing that zero interest rates don't already do but have a ruinous price tag.

Oh, come on! You know know governments don't give a shit about price tags.

 
At 5/25/2011 11:08 PM, Blogger Methinks said...

Stock prices, that is.

 
At 5/26/2011 1:31 AM, Blogger M.G. in Progress said...

"Healthy and profitable"?
Ask yourself: Where do profits come from?
Concerning health of the banking system, what are your indicators? Just profits? You cite just one that contradicts your conclusions...

 
At 5/26/2011 9:30 AM, Blogger morganovich said...

methinks-

i understand that interest rates can theoretically be negative, but i take words like "can" in "can go lower" in the practical, not the theoretical sense.

they will not go lower.

it is possible in the sense that there is such a thing, but it is not practically going to happen.

not even bernanke is that stupid, especially as the failure of QE2 is now painfully clear.

it's simply not feasible to lose that kind of money in the current political environment even if it were desirable.

QE2 made a mess, spiked inflation, destroyed value, and slowed the economy.

a neg rate qe3 would be like a neutron bomb.

 
At 5/26/2011 10:37 AM, Blogger Methinks said...

Morganovich,

not even bernanke is that stupid, especially as the failure of QE2 is now painfully clear.

I completely agree with you! But, implicit in your argument is an assumption that the Fed can always control interest rates at all times.

I think that it's clear that the Fed lost control of the short end of the curve when T-Bill rates went negative. What caused this was not the Fed's willingness but market forces. Market forces can and have overwhelmed the Fed's manipulation fairly regularly.

I don't normally want to pay you to borrow my money, but I may decide to pay you 50 bps to borrow my money if the opportunity cost of that money is a negative 3% as a result of a nasty black swan event.

I could just store the currency, I guess, but that would cost me something as well (the cost of safes and security, the risk of loss of the physical commodity). If the cost of lending it to you is lower than the cost of storing the currency, I will lend it to you.

We've been engaged in this thought experiment for a few days around here. Your input is appreciated.

 
At 5/26/2011 11:49 AM, Blogger morganovich said...

"completely agree with you! But, implicit in your argument is an assumption that the Fed can always control interest rates at all times.

I think that it's clear that the Fed lost control of the short end of the curve when T-Bill rates went negative."

i think you may be operating under a misconception here.

the fed does not set bond yields (or at least not right then, QE has been unprecedented in that respect)

the fed sets the fed funds rate. this affects bonds, but does not set their rate.

that wild swing in t-bills was driven by program trading, currency speculation, and a massive premium on safety.

most of that buying was asset reallocation out of equities and capital flight to the US from the rest of the world looking for a safe haven currency.

return = investment return X currency movement.

if you believe your currency is about to drop 20%, it may be quite rational to pay to move into a safe haven. you pay .001% to save 20.

at the time it happened, the fed was not setting those rates in any way. there was nothing for them to lose control of.

i grant you that right this moment, they are having a huge effect on the yield curve, but the events you describe took place before they took this unprecedented step. (and what a disaster it has been)

also note that rates were only negative for a couple of blips and so faintly negative as to be materially indistinguishable from zero. you never saw anything like -25bp. you saw -0.01%. (1bp)

 
At 5/26/2011 5:19 PM, Blogger Methinks said...

Morganovich,

that wild swing in t-bills was driven by program trading, currency speculation, and a massive premium on safety.

I think the key is the massive premium on safety, not the other two. The only reason I can think of for speculators and algos to accept a negative interest rate is because the other opportunities were worse. Maybe you know something about this I don't, though.

The Fed losing control of the curve was shorthand. Of course, I understand that the market ultimately sets the rates.

The Fed doesn't even set the Fed Funds rate. It sets the Fed Funds rate target (of course, you too may have been using short hand to mean just that - with the limitations of cyber conversations, it's hard to tell).

The Fed sets the Fed Funds target and the weighted average of the rates at which banks lend to each other is the actual (effective) Fed Funds rate. The Fed keeps the rate at target through open market operations.

Similarly, the Fed also regularly uses open market operations in an attempt to shift the entire curve. By buying and selling T-bills, the Fed directly attacks the short end of the curve in an effort to shift the entire curve. When rates are THIS low, however, there's not much the Fed can do at the short end to lower rates at the long end. Enter QEII - an attempt to directly attack the long end of the curve by engaging in open market manipulation..er..operations in longer maturity Treasuries. Spectacular disaster, as you say. The curve is very steep.

And so, what I mean by losing control of the short end of the curve is that the Fed's open market operations will be overwhelmed by market forces. Not hard to imagine given the dismal result of QEII.

if you believe your currency is about to drop 20%, it may be quite rational to pay to move into a safe haven. you pay .001% to save 20.

Oh yes! This is totally rational. I agree. And that's just the kind of scenario I had in mind. You can imagine even more dire scenarios that are unlikely (tail), but plausible.

also note that rates were only negative for a couple of blips and so faintly negative as to be materially indistinguishable from zero. you never saw anything like -25bp. you saw -0.01%. (1bp)

Noted! Absolutely. But, those rates could be significantly different from zero if, say, the Euro imploded. I think the market would overwhelm the Fed's efforts in such a case.

 
At 5/27/2011 9:18 AM, Blogger morganovich said...

The only reason I can think of for speculators and algos to accept a negative interest rate is because the other opportunities were worse. Maybe you know something about this I don't, though."

there were likely also just some flat out algo flaws such as the ones that led to the "flash crash". big orders based on a % of trading volume and and some sort of VWAP ratio (god knows why anyone trades that way, but they do) achieve similar things. someone crosses a block, and suddenly everyone's vol is off and 200 algos are dueling it out trying to get to 5% and pushing each other farther away.

regarding the fed funds target: do you really think they lost control or was it deliberate? my suspicion is that they were happy to see ti happen. bernanke is another bubble baby from the greenspan school. you don't get a nickname like "helicopter ben" for nothing.

his response to any crisis seems to be a tsunami of liquidity. that may well have been his policy there. note that he rapidly moved the FF target to 0-25bp.

"Noted! Absolutely. But, those rates could be significantly different from zero if, say, the Euro imploded. I think the market would overwhelm the Fed's efforts in such a case."

perhaps for a brief period, but not for the sort of time that owuld be required to drive economic activity.

that's the result of a brief panic, not a sustained economic or profitability driver.

investors will not take a negative nominal return for any length of time.

we also seem to be doing our best to persuade the world that the dollar is NOT a safe haven. we have not seen dollar rallies of anything like previous magnitudes from recent euro issues.

nobody wants to hide in a currency being debased as rapidly as ours is.

this is why long term ZIRP must fail.

eventually, you undermine so much confidence that you do far more damage than good. there are no financial buyers of our t-bills. just currency manipulators and the fed.

that is hardly a sustainable or desirable scenario.

it also implies that if the market returns to a level in which a financial buyer is interested, the federal deficit will spike, bank profitability will plummet, and economic activity will drop.

we have painted ourselves into quite a corner here.

 
At 5/27/2011 9:47 AM, Blogger Methinks said...

such as the ones that led to the "flash crash"

That's another topic, but you don't actually believe the SEC's hilarious story about the flash crash, do you?

In a very liquid market a trade of normal size (large, but not unusually so) is executed ten minutes faster than usually and the whole market collapses? My penny bids were hit out. Seriously? The largest equities market on the planet is so fragile it can be brought down by one order? Does not pass the smell test - particularly not in light of what the SEC has been doing to kill liquidity since mid-2008.

As for your criticism of the way people trade...I'm with you. I think there's an over-reliance on algos. But, it's their money, so... I just try to take advantage of their mistakes. We're all just doing the best we can for our investors.

do you really think they lost control or was it deliberate?

I'm in agreement with your assessment of Helicopter Ben. Like you, I can only speculate about motivation. But, they may not have been up to them either way. You know how hard it is for even a government player to manipulate a super liquid market against a massive current. I don't think they could. Maybe you're right - they didn't want to, but it probably didn't matter what their preference was. That's my take.

investors will not take a negative nominal return for any length of time.

I agree they don't prefer it, but they'll take it if the opportunity cost makes that decision prudent. I don't think we're disagreeing here. I just think I'm talking about a nasty tail event and, in this particular case, you're not. I agree it's not the expected. We both agree it can happen. It's an interesting thing to think about for a bit (IMO).

nobody wants to hide in a currency being debased as rapidly as ours is.

Unless it's being debased less rapidly than other currencies. Ain't that just swell? We could end up being the best of the worst - which would allow the Fed to continue on this ruinous path. And we all know that we don't have to crash for life to get very shitty.

we have painted ourselves into quite a corner here.

Nice way to sum it up. I completely agree with you. We're in a position where we win only because everyone else is doing even worse. Great. Just Great.

 
At 5/28/2011 6:03 PM, Blogger Foupfeiffer said...

Flat tax or per capita tax is regressive and non beneficial in an already astounding wealth gap.

The US financial infrastructure was systemically undermined and some of those "profits" should go to restoring the reliability of the system, ie Fannie Mae and Bernie Mac, regulation of foreclosures, swaps etc.

FED playing with fire in ruining US currency, lucky to benefit from Euro zone implosion and Japan eartthquake.

Remove the shackles of Medical Insurance and high cost education (including doctors) from our Knowledge economy, balance the trade deficit starting with oil and energy, and watch US profits and standard of living go up for everyone.

 
At 5/29/2011 1:21 AM, Blogger Ron H. said...

"Flat tax or per capita tax is regressive and non beneficial in an already astounding wealth gap."

???

A flat tax is neither regressive nor progressive; It is flat. a flat percentage. What could be more fair than that?

Are you advocating that "tax the rich" nonsense?

 

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