fdic sealIn the FDIC’s latest quarterly banking profile, the agency report overall reflects a generally healthy U.S.  banking sector. However, problems may loom on the horizon at least for some banks. In addition, the statistics reflect significant changes that have changed the face of the industry just in the past few years. The FDIC’s Quarterly Banking Profile for the Fourth Quarter 2015 can be found here, and the agency’s February 23, 2016 press release about the report can be found here.


According to the banking profile, banks reported aggregate net income in the fourth quarter of 2015 of $40.8 billion, up $4.4 billion (11.9 percent) from a year earlier. A large factor in this increase in net income was the $2.7 billion decline in noninterest expenses. This decline in turn reflected a reduction in litigation expenses for a small number of very large banking institutions. Litigation expenses in 4Q15 were $616 million, compared to $3.16 billion in the same quarter in 2014. More than half (56.6%) of the 6,182 institutions that reported fourth quarter financial results reported year-over-year growth in quarterly earnings.


While the overall picture for the banking industry was positive, the report also sounds some notes of concern. Banks continue to struggle with low interest rates and narrow interest margins. Perhaps of greater concern, as noted in the agency’s press release, is the fact that “there are signs of growing credit risk, particularly among loans related to energy and agriculture.” Net loan and lease charge-offs increased during the quarter compared to the year before, the first time since the second quarter of 2010 that charge-offs have increased year over year.


This note of concern about loans in the energy sector was echoed in a February 25, 2015 Wall Street Journal article entitled “Banks Brace for Potential Energy Losses” (here), in which the newspaper reported that “Banks are admitting what investors have long suspected: The energy bust is likely to result in major losses.” Wells Fargo reported a set-aside of $1.2 billion for bad energy industry loans. Other banks have reported reserves for loans in the energy sector as well. The article notes that things could deteriorate further if old prices remain depressed; “Banks with these unfunded loans could see their energy loans spike as distressed companies draw on their lines of credit, even as lenders are trying to keep their energy exposure low due to the sector’s difficulties.”


While these potential problems gather on the horizon, there was a positive note about the lingering impact on banking industry from the global financial crisis. That is, the agency reported that the number of problem institutions fell from 203 to 183 during the fourth quarter, which is the smallest number of problem banks in more than seven years. (A “problem institution” is a bank ranked as a 4 or 5 on the agency’s 1 to 5 financial strength rating scale. The agency does not release the names of the problem institutions.) The 183 problem institutions represent about three percent of all reporting institutions.


While the fact that there are still 183 problem banks is a concern, the overall picture is far different than was the case in the first quarter of 2011, when there were 888 problem banks, representing 11.7% of all reporting institutions. (The 888 problem institutions at the end of the first quarter of 2011 was, in turn, the highest number of problem institutions since March 31, 1993, when there were 928 problem institutions). Clearly the overall health of the banking sector is much improved since the economic downturn following the global financial crisis.


One of the most significant reasons that the number of problem banks has declined and that the overall banking  industry has improved is simply that there are many fewer financial institutions than there were before the global financial crisis. The 6,182 reporting institutions as of the end of 2015 represents a significant decline in the overall number of banks since year-end 2007, when there were 8,533 reporting institutions, meaning a decline of 2,351 banking institutions during that period (representing a decline of nearly 28%). The decline is a reflection both of the number of bank failures during the intervening period (there were 515 bank failures between January 1, 2008 and December 31, 2015), as well as mergers and acquisitions activity.


The number of reporting institutions has in fact been declining for years, even before the effects of the global financial crisis kicked in. There were as many as 9,354 reporting institutions as recently as year-end 2002, meaning that there were 3,172 fewer banks as of the end of 2015 than there were at the end of 2002, representing decline of slightly in the number of banks of slightly more than a third during that period.


While there are many fewer banks now than there were only a short time ago, the banking sector in our country is still far different than that in many other Western countries, where the banking industry is far more concentrated. But while we still have a significant number of banks in this country, the sector is in fact far more concentrated than the number of reporting financial institutions alone might suggest.


Of the 6,182 banking institutions at year, fully 5,480 have assets of less than $1 billion, representing 88.6% of all banks but only 8.3 percent of the FDIC’s insurance deposit insurance assessment base. Indeed, the 6,156 banks with assets under $100 billion represent 99.6 percent of all banks, but only about 35 percent of the insurance assessment base. The 26 banks with assets of over $100 billion represent only .04 of the banking institutions in this country, but at the same time represent fully 64.9 percent of the insurance assessment base. So while there are many more banks in the U.S. than there are in many other countries, there is very much a sense in which the banking sector in this country is quite concentrated.


There is an important difference between the bank in the U.S. and the banks in, say, Europe. And that is, the banks in the U.S. are relatively healthy. Part of the reason that the U.S. banks are healthier is that the U.S. economy is largely healthier than the European economy. However, another important part of the reason that the U.S. banks are relatively healthier is that in the immediate aftermath of the financial crisis, banking regulators in the U.S. forced banks to increase their capital, while regulators in Europe did not. The chart below, taken from the February 20, 2016 issue of the Economist (here) reflects the dramatic difference in the U.S. and European banks recapitalization following the financial crisis, as seen in the first chart below. The difference in lending actions between banks in the U.S. and Europe may be seen in the second chart.  While lending rates in all of the referenced jurisdictions remain below the pre-crisis levels, lending levels in the U.S. are doing relatively better than in Europe.  As the Economist put it, “American banks are performing better because in 2009 they were required either to raise capital for themselves or to have it forced upon them by government.”  Whether or not the relative health is sufficient to weather the next storm, however, remains to be seen.