America’s banks are taking a “bold step” in this economic recovery. It may turn into a misstep.
Such was the caution sounded earlier this month by Esther George, a longtime banking regulator who now heads the Federal Reserve Bank of Kansas City.George became the Kansas City Fed president Oct. 1, capping a career in supervision that spanned the farm banking crisis of the 1980s and the real estate busts in the 1990s.In her new post, George offered her outlook for the economy during a lunch address at the Central Exchange. One of the threats to the recovery, she said, is a shift inside the banking system.Since 2009, George said, banks’ have turned in better financial results. Profits are improving – by choice. Bankers set aside reserves to cover possible loan problems before those problems materialize. They, and their regulators, want to know the money is there ahead of time. It gives a more accurate picture of the bank’s current condition and avoids counting profits that never happen because problems turned into losses.As the recovery has unfolded, slowly but measurably, banks have kept more of their money for profits and used less of it to guard against loans going bad.“Given the current economic conditions worldwide and domestic real estate problems, I think this is a bold step,” George said during her speech. “Problem loans remain at historically high levels.”Among the largest banks, she said, nearly 10 percent of residential real estate loans are delinquent. Among smaller banks, commercial real estate loans remain a burden, especially those tied to construction and development.The question is whether the banks have socked away enough reserves to absorb the losses these loans generate.Welcome to the debate at every bank examination. Regulators will push for more loss coverage, bankers for less.Chats with a few bankers recently suggested that perhaps examiners are a bit less rabid on the topic these days.Others have noticed that banks’ collective loan portfolios are showing improvement. Fewer new problems crop up to replace the old ones that bankers write off as losses.An early December report from Wells Fargo Securities’ economics group noted that delinquencies among credit card borrowers had dropped to some of the lowest levels in two decades. But it echoed George’s caution by noting that residential loan delinquencies remain “uncomfortably high” and that foreclosures and loan losses likely remain a fixture in the industry’s future.Wells Fargo also noted that credit quality won’t improve any faster than the economy, and that the weight of problem mortgages drags on the recovery. In short, getting out of this mess will take time. The word from the top is that now is no time for bankers to tread boldly. To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.comRead more Business Columnists
Posted on Fri, Jan. 20, 2012 04:52 PM
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KC Fed’s Esther George sounds the banking alarm
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