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Banks, Financial

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Categorized | Banks

Number of ‘problem’ banks at seven-year low

Posted on November 29, 2016

The number of banks on US regulators’ list of lenders that are at risk of collapse has reached a seven-year low, a reflection of how much the industry’s health has improved since the crisis even as its profitability remains depressed.

Problem banks identified by the Federal Deposit Insurance Corporation fell from 147 to 132 over the third quarter. That compares with a high of 888 hit in the first quarter of 2011.

Meanwhile, the proportion of banks that were unprofitable during the period was the lowest since 1997, at 4.6 per cent. Only two of the near-6,000 banks insured by the FDIC failed during the period.

Regulators examine US banks and give them a score of between 1 and 5, based on quantitative and qualitative factors from capital, liquidity and bad loan metrics to the quality of management.

Those with the weakest scores are placed on the FDIC’s “problem list”. They are considered in danger of failing unless they solve problems watchdogs have identified. The designation carries tougher regulatory oversight, including scrutiny of lending practices and more frequent in-person visits by officials.

The identity of banks on the list is confidential, partly to avert panic and bank runs, as is the precise methodology the regulators use to determine inclusion, to prevent executives from “gaming” the system.

Banks given strong marks from the regulators are not even allowed to vaunt them, although the size of the premium they are required to pay into the FDIC’s insurance scheme is based in part upon their score.

Despite the impact of low interest rates, which reduce banks’ profit margins from lending, quarterly net income across the industry touched another post-crisis high of $45.6bn.

Banks have been piling on loans — balances rose almost 7 per cent from a year ago — while the Federal Reserve’s accommodative monetary policies have kept a lid on borrower defaults. Although the average net charge-off rate rose from 0.40 per cent the year before to 0.44 per cent, this remains low by historic standards.

Even so, investor returns remain below pre-crisis levels — partly because of higher capital requirements and other regulations. Industry-wide return on equity came in at 9.29 per cent, down from 9.33 per cent a year ago and shy of the 10 per cent level that analysts regard as acceptable to compensate investors for the risks they are taking on.

FDIC officials acknowledge the numbers of banks on the problem list, and the numbers of institutes that fail, are a “lagging indicator”. The longest period in modern US history without any bank failing was the two-and-a-half years before February 2007 — shortly before the financial crisis.