FDIC reports biggest drop for business loans on record

By Paul Wiseman and Pallavi Gogoi, USA TODAY


U.S. banks are earning money again, but they're writing fewer business loans, threatening a fragile economic recovery.

The Federal Deposit Insurance Corp. reported Tuesday that U.S. bank loans fell by $210.4 billion or 2.8% during the third quarter – the biggest drop since the FDIC started keeping records in 1984. Banks booked $2.8 billion in third-quarter profits, reversing a second-quarter loss of $4.3 billion. "We need to see banks making more loans to their business customers," says FDIC Chairman Sheila Bair. "This is especially true for small businesses."

Loans to businesses fell 6.5%, and real estate loans plummeted 8.1%.

"Until small businesses are able to borrow, we can't have a robust economy, because that's your largest source of jobs," says Richard Posner, a law professor at the University of Chicago and a federal circuit judge. The Small Business Administration has said that small businesses created 64% of new jobs in the past 15 years.

Banks are reluctant to make new loans until they've cleared off the bad ones they made during the housing boom. Back then, they paid "insufficient attention to certain kinds of risky loans," says Edward Kane, finance professor at Boston College. "You can't expect them to turn around and turn the lending machine back on."

Non-current loans rose more than 10% during the quarter to $366.6 billion or nearly 5% of all loans, the highest rate on record. Banks charged off nearly $51 billion in bad loans last quarter, the 11th straight quarterly increase and up more than 80% from a year earlier. "Loan losses will continue to climb as long as foreclosures keep rising and homeowners, builders and developers continue to hurt," says Kate Monahan, banking analyst at Aite Group.

Banks don't expect things to get better anytime soon: Two out of three banks set aside more reserves for losses during the quarter, reserving a total of $62.5 billion, 22% higher than last year. Banks are hoarding money in super-safe Treasury securities, and, "Businesses were not as eager to take on debt," says FDIC chief economist Richard Brown.

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Increasing bank failures are feeding the worries: 124 banks have failed this year, up from 25 in all of 2008, draining the FDIC's deposit insurance fund, which fell below zero (to minus $8.2 billion) in the third quarter. But the FDIC had earlier set aside $38.9 billion to cover losses, giving it total reserves of $30.7 billion to protect depositors in failed banks. The FDIC has another $23.3 billion in cash. The agency expects to collect another $45 billion at the end of the year when banks pay three years of deposit insurance premiums in advance.

Bair warns not to read too much into one quarter's results, noting that banks won't return to full health until the economy improves. "It really is all about the economy at this point," she says. "I don't want to make any predictions."