Why the Big Banks Aren't Doing More to Boost the Economy

NEW YORK (TheStreet) -- The banking system, while healing, is not strong enough to support economic growth on Main Street USA.

That's based on data from the FDIC Quarterly Banking Profile for Q1 2014. In my opinion, these bank numbers serve as the balance sheet for the U.S. economy. The four "too-big-to-fail" banks control 44.4% of the $14.7 trillion in total assets in the banking system.

When Bank of America (BAC)BAC, Citigroup (C)C, JPMorgan Case (JPM)JPM and Wells Fargo (WFC)WFC are under the scrutiny of the Department of Justice, the banks are focusing on legal investigations and costly fines are still pending. Settlements will likely lead to cost cutting, putting a drag on banking initiatives that would help stimulate economic growth.

JPMorgan ($57.04) is the biggest of the four "too-big-to-fail" banks with $2.104 trillion in assets. That is 14.3% of the total assets in the banking system, up from 14.1% the prior quarter and up from 13.6% at the height of the "Great Credit Crunch" in the second quarter of 2008. Total assets in the banking system are up 10.7% since the second quarter of 2008, while JP Morgan's assets are up 16.5% since that time.

Last year, JPMorgan paid a settlement of $13 billion for allegedly selling toxic mortgage-backed securities during the financial crisis.

Bank of America ($15.44) increased its assets to $1.643 trillion in the first quarter, 11.2% of the total in the banking system, up from 11% in the prior quarter. Total assets are down 8% since the second quarter of 2008.

Last week ended with a stalemate between the Justice Department and Bank of America. The feds want $17 billion to settle Bank of America's mortgage-related probes, while the company is reportedly ready to offer $12 billion.

Wells Fargo ($51.90) increased its assets to $1.436 trillion in the first quarter, 9.8% of the total in the banking system, up from 9.7% in the fourth quarter. Wells Fargo's total assets are up 7.2% since the second quarter of 2008.

Wells Fargo participated in the $25 billion mortgage settlement of 2012, but last week, a federal judge ruled that prosecutors can pursue a separate case against the nation's No. 1 mortgage lender.

Citigroup ($47.59) increased its assets to $1.355 trillion in the first quarter, 9.2% of the total in the banking system, up slightly from the fourth quarter. Citigroup's total assets are up 2.3% since the second quarter of 2008.

The Justice Department is seeking $10 billion in fines for Citigroup's involvement in mortgage-backed bonds.

The bigger banks face two other hurdles that will likely put a drag on the banking system and hence on economic growth.

Exposures to Notional Amount of Derivatives -- The seven largest FDIC-insured financial institutions control 98% of the $233.5 trillion in derivative contracts. The component risks include $185.8 trillion (85%) in interest rate contracts, $30.2 trillion (14%) in foreign-exchange contracts, and 1.3 trillion (1%) in commodity and other contracts.

The implementations on proprietary trading mandated in the Volcker Rule could force some additional liquidations.

Assessments for the Deposit Insurance Fund -- The bigger banks will pony up larger percentages than the smaller banks will. The DIF balance continues to rise; it was at $48.9 billion at the end of the first quarter.

The FDIC is mandated by law is to increase the minimum DIF balance to a reserve ratio of 1.35% of insured deposits by September 2020. Today's ratio is 0.8% with insured deposits at $6.124 trillion.

If the law were in effect today, the DIF would have to be at least $82.7 billion. Insured deposits have been on the rise because the FDIC guarantee now covers deposits up to $250,000 vs. $100,000 before the financial crisis. Assessments come from the FDIC-insured financial institutions.

Overall Status at the end of the first quarter: The 6,730 FDIC-insured financial institutions reported net income of $37.2 billion, down 7.6% year over year. The decline of $3.1 billion was attributed mostly to a $7.1 billion decline in noninterest income; reduced mortgage activity and a decline in trading revenue, which can be attributed to the larger banks. These negative trends should continue in the quarters ahead.

In short, the credit crunch that began at the end of 2007 still plagues the U.S. economy today.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff

Richard Suttmeier is the chief market strategist at ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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