Magazine article Business Credit

The Banking Crisis - Have We Turned the Corner?

Magazine article Business Credit

The Banking Crisis - Have We Turned the Corner?

Article excerpt

Is the "banking crisis" real, imagined, or are we in a period of adjustment in the banking inustry? I specifically separate national banks from thrift and credit unions in this statement. We have previously witnessed the savings and loan problems, and all reports indicate that while the Resolution Trust Company has a long road ahead liquidating failed S & Ls and restructuring those deemed salvageable, we should not expect any great surprises from that sector of the financial community.

Credit unions, for the most part, have not experienced the broad types of industry problems faced by the thrifts; however, several major credit unions have suffered significant losses in their loan portfolios and legislation may be coming to restructure their tax exempt status and define new "reserves" for credit union operation.

What we have seen in all three of these major financial industries has been institutional insolvencies as a result of poor management decisions or adverse economic conditions.

Ten years ago we had more than 5,000 national banks in the United States and we were losing approximately 20 institutions per year to failure. By September of 1985, (see Figure One) the number of federally insured national banks had declined to 4,941 and by September, 1990 the number had declined further to 4,006.

You will note in Figure One that the number of failed institutions rose through 1989 and has leveled off for 1990. However, the change in the percentage of all federally insured national banks showing operating losses followed the same upward trend as the number of failures in 1985 and 1986. But 1987 started a downward trend so that by 1990, the percentage was 21.7 percent below the 1985 figure, a substantial improvement.

During this same period, the Office of the Comptroller of the Currency (OCC) reports that the percentage of net loan losses to total loans of national banks has generally climbed. (See Figure Two.)

In addition to the improvement in the ratio of banks reporting profits, we have not seen a substantial improvement in the Return on Assets (ROA) (See Figure Two.)

ROA is a major unit of measurement in the performance of commercial banks or any profit enterprise. Through year end, December 31, 1990, the median ROA for all commercial banks in the United States, as reported by the FDIC, was .85 percent. From the ROA data in Figure Two, we see the same pattern we have observed in the changes in non-performing assets (Figure Two). It is most interesting to note that the median ROA for national banks at .51 percent is substantially lower than the national median ROA for all banks at .85 percent.

Banks Aren't out of the Woods Yet

These three major units of comparison for commercial bank performance are mixed and may indicate the industry has not reached economic stability.

All is not forgiven in the commercial banking industry and there remains a segment of the portfolio of many commercial banks that may be subject to some continued "shake out." An indication of this is found in the volume of non-performing real estate loans as a percentage of total real estate loans. (See Figure Two.)

The volume of non-performing real estate loans held by federally insured national banks has continued to grow in the period under review shown in Figure Two. However, the rate of growth slowed from 1987 to 1989, but shows a substantial increase in 1990. Again, as we have seen before, the basic data is negative, but the direction of change and the rate of change was positive through 1989. However, the figure for the third quarter of 1990 shows a substantial deterioration in the real estate portfolios of many national banks.

The OCC recently released data from its analysis of a sample of 162 failed federally insured commercial banks. This sample did not include banks licensed and regulated by individual states, credit unions, and thrift institutions. The results of this survey do not help build confidence in the commercial banking industry but set out opportunities to improve. …

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