And its eerie exhortations to the banks to prepare for a downturn to avoid “undue disruption to the financial system.”
The FDIC’s quarterly report on commercial banks and savings institutions was cited in the media mostly for the $56 billion in profits that FDIC-insured commercial banks and savings institutions made in the first quarter, which was up 27% from a year ago. An estimated $6.6 billion of the profits were due to the tax-law changes.
It remained mostly unmentioned that this increase in profits came after the huge charge-offs banks took in the fourth quarter mostly due to write-downs of tax assets, also a result of the new tax law. These write-downs slashed bank profits in Q4 to $25 billion, the worst quarter since the Great Recession.
Overall, Q1 was really exciting. Banks were firing on all cylinders, according to the FDIC: Net income jumped, loan balances rose, net interest margins improved, and the number of “problem banks” edged down. But worries are creeping up:
The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded by “reaching for yield” through investing in higher-risk and longer-term assets.
Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path.
The industry also must be prepared to manage the inevitable economic downturn, whenever it comes, smoothly and without undue disruption to the financial system.
I added the bold. This is a goodie. We had an “undue disruption to the financial system” during the last downturn, and we don’t want another one, the FDIC says.
“Undue disruption” would be when banks stop lending. That’s when credit freezes up in a credit-dependent economy. Everything comes to a halt. Paychecks start bouncing. So, don’t do that again.
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