Increased Numbers of Americans Thriving Outside the US Banking System

Banks have benefited from low interest rates, higher account fees and more mergers. The recovery from the financial crisis has helped, too. It means more people and businesses can take out and repay loans.

Banks remain generally cautious about lending. And their rebound has yet to drive a robust economic recovery from the recession that officially ended three years ago. But the banks’ gains have allowed them to make gradually more loans and keep the economy from slowing further. Bank loans rose at a 2.1 percent annual rate in the first three months of 2012 and at a 4.6 percent rate since then, according to the latest Federal Reserve data.

Signs of the industry’s improvement:

    • Banks are making more money. In the first three months of 2012, the industry’s earnings reached $35 billion, up from $29 billion in the first quarter of 2011. It was the best showing since 2007. At the depth of the recession in the fourth quarter of 2008, the industry lost $32 billion.

    • Fewer banks are considered at risk of failure. In January through March this year, the number of banks on the Federal Deposit Insurance Corp.’s confidential “problem” list fell for a fourth straight quarter. The list consists of banks considered at risk of failure. The list numbers 772 as of March 31 — about 9.5 percent of U.S. banks. At its peak in the first quarter of last year, the number was 888.

    • Bank failures are down. In 2009, 140 banks failed. In 2010, more banks failed (157) than in any year since the savings and loan crisis of the early 1990s. In 2011, 92 failed. This year, regulators closed 31 in the first half of the year. For the full year, they’re on pace to shut down around 60. That’s still more than normal. In a good economy, only about four or five banks close each year. But the pace shows sustained improvement.

    • Less fear of loan losses. The money banks must set aside for possible loan losses declined by nearly a third in the January-March quarter compared with a year earlier. Their loan portfolios have grown safer as more customers have repaid on time. FDIC figures show loan losses have fallen for seven straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for eight straight quarters.

The main reason for the sharp drop in bank closings has been a stronger economy. Employers have added nearly 1.8 million jobs over the past year, which means more people and businesses have money to repay loans.

Also helping strengthen the banks:

• Record-low interest rates. They’ve enabled banks to pay almost nothing to depositors and on money borrowed from other banks or the government. They’re paying an average of 0.5 percent on money-market accounts and interest checking accounts. Yet they charge their own borrowers much higher rates on credit cards and other loans. They’re taking in an average of around 16 percent on credit cards, 5.7 percent on home equity loans, 3.8 percent on auto loans and 3.6 percent on 30-year fixed-rate mortgages.

• More bank mergers. Fifty-one bank mergers were announced in the first quarter, according to SNL Financial. That was up from 39 deals in the first quarter of 2011. Some weak banks have agreed to be bought by stronger institutions to avoid failing, says Robert Clark, a senior analyst at SNL Financial.

• Higher capital levels. Banks have boosted their capital, the cushions they hold against risk. They increased it by nearly 4 percent in the first quarter, according to FDIC data. That raised the industry’s average ratio of capital to assets to 9.2 percent, matching the record-high ratio of the second quarter of 2011.

The industry’s rebound began in 2009 with the biggest U.S. banks, thanks to taxpayer bailout aid. Small and midsize banks have taken longer to rebound. They were saddled by high-risk real estate loans used to develop malls, industrial sites and apartment buildings. Many of those loans weren’t repaid. As the economy has strengthened, fewer loans have soured, and many smaller banks have recovered.

Past-due rates on commercial real estate loans began to decline last year. And banks have boosted the number of commercial loans they’ve been able to sell to investors.

For example, net income for Regions Financial Corp., a midsize bank based in Alabama, jumped in the first quarter this year to $145 million, from $17 million a year earlier and a loss of $255 million in the first quarter of 2010. Regions issued more home and commercial loans, and its mortgage revenue jumped 35 percent.

Regions also got approval from the Fed to repay the $3.5 billion bailout money it received during the financial crisis. And the money it set aside for loan losses was the lowest in more than four years. More of its customers are paying on time.

At the same time, some small and mid-size banks remain vulnerable. That’s especially true in states hit hard by the real estate bust or by slumping state economies. California, Florida, Georgia and Illinois reported the highest number of bank failures in the past four years. They’re also among the states with the highest home foreclosure rates.

One reason is the fees banks have traditionally feasted on, such as overdraft fees on checking accounts, have been curbed by new regulations. Banks are now barred, for example, from automatically enrolling customers in a service that charged them up to $35 for overdrafts.

That change is cutting into revenue for community banks in particular. So are the costs of complying with some regulations imposed by the 2010 financial overhaul law.

Experts caution that government examiners have let some smaller banks make their balance sheets appear stronger than they are.

“There’s a lot of stuff hidden under the hood,” such as soured loans that haven’t been adequately written down, warns Daniel Alpert, managing partner at the investment bank Westwood Capital Partners. Those risks could surface if the economy suffers another shock, Alpert says.

U.S. bank failures consist of both federally chartered and smaller, state-chartered banks. The federal government insures both and guarantees deposits of up to $250,000 per account.

Overhanging the banks’ future is the health of the U.S. economy. That, in turn, hinges on whether employers step up hiring and sectors like manufacturing and construction improve. Europe’s debt crisis poses a big threat, too.

U.S. banks have reduced their exposure to Europe. But a collapse of the 17-country euro alliance would likely weaken the U.S. banking system. Export markets for U.S. manufacturers could shrink. The U.S. economy would slow. Businesses and consumers whose loans drive banks’ revenue would find it harder to repay their loans. And banks would be squeezed.

“Banks can only be as strong or weak as the economy,” says Mark Williams, a finance professor at Boston University and a former bank examiner for the Federal Reserve.

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