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Bank Industry Strong, Regulators Say

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[March 05, 2008]  WASHINGTON (AP) -- Banking and savings and loan institution regulators insisted Tuesday that the system remains strong despite precipitous declines in earnings sparked by the mortgage crisis.

"The vast majority of institutions remain well-capitalized," Federal Deposit Insurance Corporation Chairman Sheila Bair told a Senate Banking Committee hearing on the state of the banking industry.

Credit losses "are going to continue to tick up," and the FDIC expects some increases in its troubled bank list, she said. Banks do fail, she added, but "I think we'll still be easily within historical norms. I don't think it will be anything we can't handle."

She noted that at the end of 2007 there were 76 institutions on the FDIC's "problem list," compared to 1,430 at the end of 1991.

That message was echoed by others on the panel. Donald Kohn, vice chairman of the Board of Governors of the Federal Reserve System, reported that preliminary figures showed bank holding companies losing more than $8 billion in the fourth quarter of last year because of writedowns and loan losses. But they also had net income for the year of $90 billion.

"The U.S. banking system is facing some challenges, but remains in sound overall condition, having entered the period of recent financial turmoil with solid capital and strong earnings," Kohn said.

Federal Reserve Chairman Ben Bernanke sent stocks down last week when he told lawmakers that "I expect there will be some failures" of banks as a result of the housing and mortgage crisis. He said in a speech Tuesday that more aggressive action is needed to reduce the rate of preventable foreclosures.

One action, said Banking Committee Chairman Christopher Dodd, D-Conn., would be for the regulatory agencies to do a better job of oversight to ensure that lending markets are run in a safe and sound manner.

He criticized former Federal Reserve Chairman Alan Greenspan for not stopping, even encouraging, the kinds of adjustable rate and non-traditional mortgages that have contributed to the collapse of the housing market.

"Where were the regulators?" as credit markets declined over the past year, Dodd asked. "And when the alarm went off, did they merely hit the snooze button?"

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Several lawmakers asked about bank relations with credit rating agencies, such as Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings, that have been criticized for not properly evaluating the risks of bonds backed by mortgages given to borrowers with weak credit.

"We are telling our banks to rely less on the credit rating agencies," Kohn said.

Sen. Bob Corker, R-Tenn., also expressed concern that banks "could end up being the greatest problem we have" by cutting back on lending and thus stunting the economic recovery.

Kohn said more caution in lending is a necessary correction for an industry that didn't fully appreciate the risks of some loans, but acknowledged that if lenders become much more cautious "that can have elements of a self-fulfilling prophecy."

Among others testifying, John Reich, director of the Office of Thrift Supervision, said the thrift industry he regulates saw profits drop from $15.8 billion in 2006 to $2.9 billion last year. The industry recorded a loss of $5.2 billion in the fourth quarter of 2007.

He said thrifts, which currently hold about two-thirds of their assets in mortgages and mortgage-related instruments, remain strong in terms of capital. "We are maintaining a watchful eye on credit and interest rate risk."

JoAnn Johnson, chairman of the National Credit Union Administration, said that while the industry was in good shape, the aggregate delinquent loan ratio climbed from 0.68 percent to 0.93 percent last year.

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On the Net:

Senate Banking Committee: http://banking.senate.gov/

[Associated Press; By JIM ABRAMS]

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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