FDIC: Reduced Loan-Loss Provisions Boost Bank Earnings

09-01-2010 • GlobalEconomicAnalysis.blogspot.com

IThe other issue that's totally ignored regards borrowers making monthly payments on time even though the collateral is very much underwater. Knowing the collateral value is below the loan amount would increase the potential for loss and thus force a bank to increase loan loss reserves, thereby lowering earnings. No bank really wants to do that, so most of them don't. Lastly, I know of certain cases where loan officers at other banks are afraid to tell bank executives when they have real loan issues in the making. Bank officers might take 2-4 months to notify their executives of a potential loan loss. This too delays the recognition of the need to increase reserves for those loans. In my estimation, if every bank had the collateral of all loans accurately appraised and each loan’s loan grading was finely tuned for an expected loss based on financial performance and collateral values, the number of essentially bankrupt banks in this county would increase by a factor of 4-5 from the current level. In other words, there is a potential pool of 2000-3000 banks that would be on the FDIC radar's for getting closed. The health of the industry is not accurately reported by any means.