HuffPo: Bank Profits Soar, Lending Falls As Banks Pay Next To Nothing For Funds

[Amerigo Vespucci]

Bank Profits Soar, Lending Falls As Banks Pay Next To Nothing For Funds

http://www.huffingtonpost.com/2010/08/31/bank-profits-soar-lending_n_700574.html

Shahien Nasiripour
[e-mail] | HuffPost Reporting

First Posted: 08-31-10 03:00 PM | Updated: 08-31-10 03:02 PM

Bank profits jumped 21 percent last quarter to nearly $22 billion, the highest level in three years, as banks put away less money to cover future losses, fewer borrowers fell behind on payments and lenders paid the least for their funds in perhaps 50 years, a government report released Tuesday shows.

Lending also dropped by about $96 billion, or 1.3 percent, as borrowers continue to remain skittish about the "slow recovery," Federal Deposit Insurance Corporation Chairman Sheila Bair told reporters Tuesday in Washington. "Consumers and businesses need to have confidence in the recovery before they will start making decisions on credit," Bair said, according to a transcript of her remarks.

Meanwhile, despite the sector's high profits, challenges remain: home prices are forecast to decline into next year while lenders continue to repossess homes at record rates; the commercial real estate market has yet to hit its nadir; community banks continue to fail; and the number of lenders on the FDIC's confidential "Problem List" continues to grow. Nearly 830 banks are on the list, up from 775 at the end of March, the FDIC's quarterly report shows.

"Without question, the industry still faces challenges," Bair said in a statement. "Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength... most asset quality indicators are moving in the right direction."

It also helps that banks' cost of funds -- the money they pay to garner deposits and other funds that are then used to lend, invest or trade -- dropped to the lowest rate in 26 years of FDIC quarterly records. Banks paid 0.97 percent in interest for their funds, the first time they've paid less than one percent during a quarter since at least 1984, FDIC documents show.