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Banks, savings institutions report record income

But path to profitably has not been easy

It has been a difficult and painful process, but the most recent report from the Federal Deposit Insurance Corporation shows the nation’s banks are increasingly profitable and fewer institutions are troubled.

The FDIC reported in August that insured commercial banks and savings institutions reported aggregate income of a record $42.2 billion in the second quarter of 2013, up 22.6 percent from the same period a year ago. It marked 16 consecutive quarters of higher earnings.

“Asset quality continues to recover, loan balances are trending up, fewer institutions are unprofitable, the number of problem banks is down, and the number of failures is significantly below levels of a year ago,” said Martin Gruenberg, FDIC chairman.

Through the first half of 2013 there were 20 bank failures, half the number in the same period a year ago. And, the number of banks on the FDIC’s “Problem List” declined from 612 to 553.

The path to profitability, however, has not been easy. It was just five years ago the banking industry was rocked by the failure of Lehman Brothers.

Founded in 1850, the investment banking firm became the victim of several financial circumstances, including the subprime mortgage crisis, lingering effects of the September 2001 terrorist attacks and internal mismanagement.

In a recent speech discussing lessons learned from the financial crisis and monetary policy, Federal Reserve Board governor Jeremy Stein said there were warning signs before the bankruptcy of Lehman.

“The first serious tremors associated with the crisis were felt in August 2007, with BNP Paribus suspending redemptions on its money funds and investor runs on multiple asset-backed commercial paper programs,” Stein said. “At this point, there was no longer any real doubt about the nature of the shock confronting us, even if its precise magnitude was yet to be determined.”

Realizing the problem was not limited to just Lehman and a handful of other institutions, Stein was critical about the failure of regulators to act immediately to protect the assets of banks being caught up in the crisis.

“The largest U.S. financial firms -- which, collectively, would go on to charge off $375 billion of loans over the next 12 quarters -- paid out almost $125 billion in cash to their shareholders via common dividends and share repurchases, while raising only $41 billion in new common equity,” Stein said. “This all happened while there was a clear and growing market awareness of the solvency challenges they were facing.”

The collapse weighed on the overall financial markets. The collective market cap of the financial firms fell by approximately 50 percent from the start of 2007 through the end of June 2008.

To put it mildly, the Lehman Brother bankruptcy and other failures triggered a flood of regulatory actions and other efforts to try and prevent similar crises from occurring in the future.

Most recently, the Federal Reserve in July approved new rules to ensure banks maintain strong capital positions enabling them to continue lending to creditworthy households and businesses.

Federal Reserve Chairman Ben Bernanke said, “This framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks. With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.”

In its 2013 Banking Industry Outlook report, Deloitte LLC said bankers today are still making decisions affected by the situation in 2008. The report it said institutions in the United States, “put a hold on making any meaningful changes in leadership, organizational structure, and operational processes in the aftermath of the financial crisis. Certainly, they were focused on ensuring the survival of their institutions, and rightly so.”

However, Bob Contri, vice chairman of Deloitte’s banking and securities sector, said things are slowly changing.

“The market is starting to get away from being frozen by regulation and so there is likely going to be a big push to get more strategically focused around where organizations think they have the best ability to compete and win,” he said.

To be sure, every move the banks make and every step they take will still be closely watched by regulators.

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