Banks Need Lending Firehose: FDIC

WASHINGTON ( TheStreet) -- Acting Federal Deposit Insurance Corp. chairman Martin J. Gruenberg wants banks to turn on the lending firehouse... for their own good.

While saying that the nation's banks were "generally well positioned to continue working through this difficult episode," with industry earnings growing for eight straight quarters and the percentage of noncurrent loans declining for five quarters, Gruenberg pointed out that "reductions in loan-loss provisions -- the money banks set aside against expected loan losses -- account for most of the improvement in industry earnings."

"As the levels of loan-loss provisions approach their historic norms, the prospects of earnings improvement from further reductions diminish," the acting chairman said, concluding that "increased lending will be essential for future revenue growth."

The FDIC reported that combined U.S. banks and thrifts earned $28.8 billion during the second quarter, which was an increase of $7.9 billion from the second quarter of 2010. The largest lenders saw their earnings boosted -- or losses mitigated -- by significant releases of loan loss reserves.

At the holding company level, JPMorgan Chase ( JPM) reported net income of $5.4 billion during the second quarter, boosted by a $1.2 billion reserve release. For Citigroup ( C), second-quarter earnings of $3.3 billion were helped by a $2.2 billion decline in loan loss reserves. Wells Fargo ( WFC) reported second-quarter net income of $3.9 billion, with its bottom line directly boosted by a $1.1 billion decline in reserves. For Bank of America ( BAC), the pain of a $8.8 billion second-quarter loss was somewhat eased by a $2.5 billion decline in loan loss reserves.

The FDIC said the industry's loan-loss provisions -- additions to reserves to cover expected loan losses -- totaled $19 billion during the second quarter, which was a 53% decline from a year earlier, although it was "the smallest year-over-year decline in the past five quarters."

The acting FDIC chairman went on to discuss the agency's priorities, including the continued implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama in July 2010 -- including the recent rulings requiring the largest banks and holding companies to submit living wills to regulators, detailing plans for the orderly disposition of assets in the event of failure.

On the future role of community banks, facing the likelihood of continued consolidation, Gruenberg pointed out that "these institutions, with assets under $1 billion, comprise nearly all of the approximately 7,500 insured financial institutions in the country." The chairman underscored the smaller lenders' crucial role in job creation, saying that "while community banks with assets under $1 billion represent less than 11 percent of banking assets, they provide nearly 40 percent of the loans the banking industry makes to small businesses."

In the face of a growing regulatory burden for all banks, including community banks, Gruenberg said "the FDIC is going to undertake a number of initiatives to further our understanding of the challenges and opportunities for community banks going forward," and that the initiatives would include "reviewing key challenges facing community banks such as raising capital, keeping up with technology, attracting qualified personnel, and meeting regulatory obligations."

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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