Sure, the big banks appear to be stabilised, but you’ve probably noticed the weekly wave of bank failures handled by the FDIC.
Outside of the protected few, the financial crisis isn’t over. There are still piles and piles of bad loans, threatening to push various institutions into insolvency.
And now the FDIC is angry.
Marketwatch (via Market Ticker): The Federal Deposit Insurance Corp. said late Monday that banks should recognise losses on home loans promptly and warned that failure to do so could delay efforts to mitigate the financial impact.
Institutions must analyse the collectibility of the loans they hold for investment at least every quarter, the FDIC said in a statement on its Web site.
Banks then have to keep an appropriate allowance for loan and lease losses, covering estimated credit losses on individually evaluated loans that are deemed to be impaired, and on groups of loans with similar risk characteristics, the regulator said.
The FDIC’s full statement is here.
Note the FDIC’s own italics in this part:
The Interagency Policy Statement further notes that changes in the level of the ALLL should be directionally consistent with changes in the factors, taken as a whole, that evidence credit losses, keeping in mind the characteristics of an institution’s loan portfolio. In this regard, if declining credit quality trends relevant to the types of loans in an institution’s portfolio are evident, which is generally the case in the current economic environment, the ALLL level as a percentage of the portfolio should generally increase, barring exceptionally high charge-off activity.
In particular, institutions are reminded that, when estimating credit losses on each group of loans with similar risk characteristics under FAS 5, they should consider their historical loss experience on the group, adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the loans in the group as of the ALLL evaluation date.
Bottom line: the FDIC is telling banks that they can’t just keep marking assets based on historical measures. They must be “adjusted for changes in trends, conditions and other relevant factors.” Got that banks?
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