Let me clear from the start. After paying for the mistakes of their past poor lending practices in the order of $400-500 billion in losses, the U.S. banking industry will survive and recover from the Greatest Recession Since the Great Depression (GRSGD) quite well and everything will return to normal.
The indication of the banking industry’s resilience is already beginning to show in the latest set of numbers reported to the FDIC. Here’s a chart that provides a snapshot view:
Five-Year Bank Financials
Reported to FDIC as of 06/30/2010
(Dollars in Billions)
Total Interest Income
Total Interest Expense
Net Interest Income
Total Noninterest Income
Total Noninterest Expense
Net Noninterest Expense
Net Interest & Noninterest
Less Provision for Losses
Pre-tax Net Income
Less Tax and Extraordinary
Other Items of Note
Equity Less NPA
Net Charge offs
Salaries–part of non int exp
* 2010 Figures annualized by doubling current amounts reported as of 06/30/2010
Source: FDIC Statistics on Depository Institutions
The five-year period that is shown in Exhibit 1 allows us to see somewhat how things have changed in the banking industry before and since the GRSGD. For example, the financial values of 2006 provide a fair perspective of the steady state condition of the banks prior to the GRSGD; the values from 2007 reflect the first initial signs of the GRSGD; and the values from the last three years show how the banks have managed to pay for their mistakes.
So how have the banks recovered and paid for their mistakes? The first two of lines of Exhibit 1 (net interest income and net interest expense) tell quite a bit of the story. The banking industry has borrowed cheaper and passed less of their cheaper borrowing onto the customer. Net interest income in 2010 is up nearly $100 billion from the values of 2006. Ka-chink number one.
Although the banking industry has been able to maintain their non-interest income resulting from their fiduciary activities, services charges, and trading fees pretty much constant throughout the GRSGD, non-interest expense which reflect things like salaries and employee benefits, premise and equipment expense has gone up.
Of course, we have to remember that banks do not operate like most businesses. When problems arise in most business, it results in personnel layoffs, bonus cuts, and even the shutdown of inefficient operations. In the banking industry, inefficient operations are simply taken over by another bank and reopened under new management.
So in the banking industry, one of the best ways to account for poor management practices is not to reduce salaries and bonuses, but to cut dividends paid to the stockholders. Check Exhibit 1 out to see if this has been the case. Ka-chink number two.
Another way to help cover losses for your mistakes is to pay less taxes, or in other words, write the losses for your mistakes off, and let other taxpayers pick up the bill. Ka-chink number three.
Bankers are by no means stupid and a quick review of their financials shows that to be the case. Instead of looking for inefficiencies inside their organisations, they have managed to pass their “mismanagement” onto their customers, their stockholders, and the taxpayers.
While managing to pull this off, the banking industry has been able to reduce their assets by cutting the amount of their lending (loans are down about a little over $650 billion since 2007) while increasing their book equity. Such a deal. And to think we gave them TARP, too.