Federal Deposit Insurance Corporation
On the Release of the
Quarterly Banking Profile
September 11, 1996
The numbers you have before you this morning show
that commercial banks continue to enjoy great profitability.
They also show an increase in credit-quality problems in loans
to individuals -- particularly credit card loans. Finally, these
numbers shed light on the continuing problems of the Savings
Association Insurance Fund.
The earnings of commercial banks have never been
better. If the commercial banking industry maintains the
earnings strength it displayed during the first half of 1996 for
the next six months, it will -- for the first time ever -- earn more
than $50 billion in one year. Bank earnings in the first half of
1996 were more than 10 percent higher than earnings in the
first half of 1995.
In the second quarter of 1996, commercial banks earned
$13.78 billion -- the second time the industry's profits have
exceeded $13 billion and a 15-percent improvement over the
$12 billion that commercial banks earned in the second quarter
The average return on assets (ROA) at commercial
banks has exceeded one percent for fourteen consecutive
quarters. ROA -- a basic yardstick of profitability -- stood at
an annualized 1.27 percent in the second quarter, up from
1.16 percent a year ago. This was the third-highest quarterly
ROA that commercial banks have ever registered.
Moreover, stronger earnings were widespread. Almost
three-quarters of all banks (72 percent) reported higher
earnings than a year earlier, and more than two-thirds (70
percent) reported ROAs above one percent.
Earnings are not the only way to measure the financial
strength of the banking industry. Another important measure
is the coverage ratio. This ratio is the amount of money banks
have in loan loss reserves compared to their noncurrent loans --
loans past due 90 or more days or in nonaccrual status. As this
chart shows, banks have a record $1.77 in reserves for every
dollar of noncurrent loans. That compares to $1.67 a year ago
and $1.46 two years ago. As recently as 1993, commercial
banks had less than a dollar in reserves for every dollar in
The recent trends for commercial banks have not all
been positive, however. Banks charged off $3.8 billion in loans
in the second quarter -- a billion dollars more than they
charged off in the second quarter of last year, or an increase of
36 percent. It was the second-highest quarterly amount
charged off in the last ten quarters. The highest was the $4
billion charged off in the fourth quarter of last year.
Much of the rise in losses in the second quarter
occurred at banks with assets of more than $1 billion.
As this chart shows, the increase in loan losses was due --
in large part -- to charge-offs on loans to individuals.
Charge-off rates on these loans have risen sharply from 1.40
percent in the second quarter of 1994 to 2.24 percent in the
second quarter of 1996.
In fact, net charge-offs on bank credit-card loans
accounted for almost two-thirds of all loan losses in the second
quarter. The annualized charge-off rate on those loans in the
second quarter was 4.48 percent -- the highest level since the
fourth quarter of 1992.
Bank credit card loans also continued to increase
rapidly -- growing more than $7.3 billion in the second quarter.
As this chart shows, in terms of both loans outstanding and
unused commitments, the 12-month growth rate for credit card
credit has slowed the last year -- from a peak of 33.8 percent in
the second quarter of 1995 to 20.6 percent in the second
quarter of 1996. The growth, however, is still dramatic.
Credit card loans that banks have made grew $55.4 billion
during the last twelve months, while commitments rose $213.2
billion. Credit made available through credit cards has more
than doubled since the end of 1992.
Despite these concerns, the outlook for commercial
banks remains bright. Thirty new banks were chartered
during the quarter, bringing the total number of new charters
in the first half of 1996 to 59. If this pace continues, we will
outdistance the 102 new bank charters issued last year.
Mergers absorbed 175 banks in the second quarter and two
banks failed, bringing the number of commercial banks down
from 9,838 at the end of last March to 9,689.
The thrift industry also shrank in the second quarter of
1996. Although total assets grew, the number of thrifts -- Bank
Insurance Fund (BIF) and Savings Association Insurance Fund
(SAIF) insured institutions -- dropped below 2,000 for the first
time since 1937. The number of SAIF insured thrifts declined
from 1,622 in the first quarter to 1,599 in the second. Such
shrinkage will concentrate risks that the SAIF covers, leading
to an actuarially and structurally unsound deposit insurance
This kind of shrinkage is not the only problem the SAIF
As this chart shows, the SAIF increased from 51 cents
for every dollar of insured deposits at the end of the first
quarter of 1996 to 55 cents at mid-year. However, the increase
in the SAIF's reserve ratio came -- not only from a $264 million
rise in the fund balance -- but also from a decline of nearly $3
billion in SAIF-insured deposits. This decline reflects
continuing shifting of deposits from the SAIF to the BIF -- a
process called "migration." One organization has reduced its
SAIF deposits by more than $9 billion in this way, including
the shifting of $3 billion in the most recent quarter. As you
know, Federal regulatory agencies have recently approved
several applications from thrift organizations to acquire BIF-member
At current assessment rates, the SAIF needs an
assessment base of $333 billion to generate the money
necessary for it to meet obligations issued by the Financing
Corporation (FICO) that pay for thrift failures in the 1980s.
This chart shows that the "cushion" -- the surplus in the FICO
assessment base above $333 billion -- has been shrinking
steadily since the SAIF was created in 1989. At the end of the
second quarter, it was about $110 billion above the required
base, down from a $118 billion cushion in only one quarter.
Most of the erosion in the FICO base over the years can be
attributed to charter conversions and branch sales to BIF
members, but migration of deposits from SAIF to BIF also
clearly threatens both the viability of the SAIF and its ability
to meet its FICO obligation. As this chart also shows, SAIF
deposits that have the potential to migrate to the BIF in the
near future exceed the FICO cushion.
The SAIF is structurally unsound. It cannot resolve its
own problems. Those problems have to be addressed.
In the brief time remaining this year, I urge Congress to
adopt a comprehensive legislative package that would
capitalize the SAIF, establish a framework for addressing
charter issues and the merger of the BIF and the SAIF, and
provide regulatory burden relief for banks.
I only hope that recent legislation removing the tax
penalties for converting from a thrift charter to a bank charter
will not give thrifts incentives to walk away from this
compromise legislation to avoid paying the special assessment
of $5 billion and to migrate deposits from the SAIF to the BIF.
It is in everyone's interest -- banks, thrifts, their customers and
the financial system -- to get this issue behind us.
With me today are Don Inscoe, the manager of the
FDIC Statistics Branch, and Ross Waldrop, Tim Critchfield
and Jim McFadyen, the FDIC analysts who put together the
Quarterly Banking Profile. We will now entertain questions.