Banking System Has 44 Fewer Banks At The End Of Q2

Includes: IAT, RKH, XLF
by: John M. Mason

According to the Federal Deposit Insurance Corporation there were 44 fewer commercial banks in the banking system at the end of the second quarter this year than were in existence at the end of the first quarter.

In the second quarter the FDIC closed only 15 banks. Ten more banks have failed in the third quarter. So, the number of banks in the banking system continues to decline with banks either closing by the will of the FDIC or through merger into another organization.

At the end of the first quarter there were 27 fewer banks in the banking system than there were at the start of the year. For the full year ending March 31, 2012, 190 commercial bans left the system either through being closed or by merger.

At the end of the second quarter there were only 732 banks on the FDIC's list of problem banks. This is down from 772 banks at the end of the second quarter. Things seem to be getting better by with over 700 banks on the regulator's problem list, more than ten percent of all the commercial banks in existence.

The difficulties in the banking sector have not been fully resolved as of this date. But, banks with problems continue to leave the system without much public attention and with little or no disruption to the rest of the financial system.

Furthermore, bank lending appears to be picking up.

Over the past four weeks, according to Federal Reserve data (H.8), Loans and Leases at all commercial banks in the United States rose by over $16 billion; over the past thirteen weeks, Loans and Leases rose by almost $58 billion.

The year-over-year growth rate for the latest monthly figures show that Loans and Leases are up by 5.0 percent. So, the banking system…at least parts of it…are finally showing some life.

Business loans (Commercial and Industrial loans) have shown the strongest increases in the lending category with almost all of the increase coming at the largest 25 domestically chartered banks in the United States.

Over the last four weeks, C&I loans rose by slightly more than $4.0 billion, with 95 percent of the total recorded at the largest domestically chartered banks. Over the past thirteen weeks, C&I loans rose by $37.0 billion with almost 90 percent of the increase coming from the largest banks.

The numbers are good, but there are concerns about whether or not these business loans are being used for productive purposes. The larger corporations are still taking advantage of extra-low interest rates and continue to build up cash assets for use in buying back stock, for paying dividends, or for potential mergers and acquisitions.

We need to keep a close eye on this and observe whether or not banks continue to make business loans and whether or not the loans are being used for acquiring plant and equipment or building up inventories. This will be important for understanding when economic growth might pick up.

Real estate lending continues to remain week in the commercial banking industry. Over the past thirteen-week period, real estate loans are down by almost $5.0 billion. For the past four weeks, real estate lending in roughly flat.

There does appear to be some pick up in residential real estate lending at commercial banks. Mortgage lending at commercial banks was up almost $8.0 billion over the past thirteen weeks and most of this increase came from the domestically chartered commercial banks that were not a part of the largest 25. This performance is part of a relatively strong year-over-year result for these "smaller" banks and bodes well for a possible pick up in the housing industry. Again, this is a figure that needs particularly close watching.

Commercial real estate loans continue to plague the banking system with problems. Loans in this are still down, especially when one looks at the year-over-year data.

Consumer lending at commercial banks over the last quarter seem relatively anemic. Consumer loans in the US banking system actually fell modestly (slightly more than 3.0 percent) over the last thirteen weeks and were basically flat over the past four weeks.

In summary, I would say that the banking system is divided into roughly three classifications: banks that are financially in good shape; financial institutions that still have some asset issues; and the commercial banks that are still not in very good shape. This last category, from all I can tell is still substantially larger than we would like it to be.

The first two classifications of banks seem to be opening up as far as their lending is concerned. The largest banks are moving more readily into business loans and the "smaller" banks are doing some business lending but have moved more into the residential lending space. The commercial banks are starting to participate in the economic recovery.

But, the bank lending does not seem to be having much impact on the spending stream. For a more vibrant economy we need businesses to spend their loans so that the funds get into the money stream and other people can then spend the money and so on and so forth. At the present time, the primary increases in the money stock are coming from other short-term asset classes and not from the multiplier effect of bank lending. To have a healthy economy we need more money stock growth coming from the lending that banks are doing rather than from people re-arranging their asset portfolios.

Note: I have noted over the past year or so that foreign-related financial institutions have acquired a lot of money here in the United States and passed this money along to "related foreign offices". The timing of these flows has been closely connected with the financial crisis taking place in Europe.

An apparent reflection that financial pressures eased over the past four-week period is that the net balances due to related foreign offices at foreign-related financial institutions in the United States fell by more than $50 billion!

However, net balances were still up over the last thirteen weeks (by almost $20 billion) and were up over the past year by more than $160 billion.

The United States is still helping to provide liquidity to European banks to get them through their period of financial distress. Overall, these net deposits due to related foreign offices have been from $350 billion to $400 billion higher than they were before the crisis picked up about three years ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.