Banks See Hard Times Even After Bailout

Study finds TARP money infusion has had little effect

June 12, 2009

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Despite the infusion of nearly $200 billion of federal bailout money into the banking system since last October, the nation's banks had another rough quarter in the first three months of 2009.

And while the Bank of Americas and CitiGroups get the most attention, an analysis of federal bank data by American University's Investigative Reporting Workshop suggests that mid-sized banks are suffering more than the largest banks.

The analysis is a continuation of BankTracker, a first-of-its-kind project by the Workshop and MSNBC.com that found bad loans among America's banks had increased nearly 149 percent in 2008.

"From the data, it is difficult to find the effects of the Treasury Department's so-called TARP (Troubled Asset Relief Program), either on bank capital or on bank lending activity," said Wendell Cochran, the Workshop's senior editor and primary author of the BankTracker project.

The analysis is based on quarterly condition reports filed with the Federal Deposit Insurance Corp., the federal agency that is part of the bank regulatory system and protects deposits in banks across the nation.

The 10 largest banks, which possess nearly half of all bank assets, reported earning about $10 billion from January 1 through March 31. Much of the gain, according to the FDIC, came from securities trading profits at the largest banks.

The remaining 8,240 banks collectively lost more than $2.5 billion. A loss considerably better than the $36.9 billion banks lost as a group during the fourth quarter of 2008. A year ago in the first quarter, banks made $19.3 billion.

Even with the overall profit, the FDIC reported that three in five banks saw their earnings decline in the first three months of 2009, compared with the first quarter of 2008. Additionally, more than one in five banks lost money in the first quarter.

Banks of all sizes saw more bad loans accumulate on their books as the deepening recession and bleak real estate market took their toll.

Total troubled assets — the sum of loans more than 90 days past due and the value of foreclosed property banks on bank books — increased to $285 billion at the end of March, up from $237 billion at the end of 2008. At the end of March 2008, banks only had $137 billion in non-performing loans and foreclosed property on their books.

The combination of lower profits and more bad loans meant that more banks saw their capital under growing stress. As of March 31, 238 banks had more troubled assets on their books than they had in capital and loan loss reserves. At the end of December 2008, 165 banks had a "troubled asset ratio" of greater than 100 percent. Only 44 banks were in that category a year ago.

While the "troubled asset ratio" is not a predictor of bank failure, 29 of the 37 banks that already have failed this year had ratios of greater than 100 percent.

The FDIC reported that 305 banks were on its "troubled institutions" list at the end of 2009's first quarter — up from 252 at the end of 2008. Those 305 banks had total assets of $220 billion. The FDIC does not disclose which specific banks are on the list.

A decline in lending between the fourth quarter of 2008 and the first quarter of 2009 signals an additional impact of the recession on banks. The amount of loans outstanding fell to $7.5 trillion at the end of March, compared to $7.7 trillion at the end of December. Brought on by tightening credit standards as well as a drop in demand for business and consumer loans, it was the third consecutive quarterly decline.

Even though the numbers underline the financial squeeze Americans have been feeling for quite some time—and likely will continue to feel for quite some time—there is perhaps one bright spot in the loan data.

"The amount of loans 30–90 days past due was flat in the first quarter, at $158.3 billion, after ballooning by more than $37 billion in the fourth quarter," Cochran said. "This could indicate that fewer borrowers are falling into default, despite the rising levels of joblessness. A year ago, loans in the same category were $110 billion."

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