- 23Nov
(Reuters) - Banks showed further signs of recovery in the third quarter, helped by the lowest level of loan-loss provisions since before the 2007-2009 financial crisis, but drew a warning from a top regulator not to go too far.
Federal Deposit Insurance Corp Chairman Sheila Bair said banks should not cut reserves too quickly given the fragile economy."Many institutions came into the recent crisis with inadequate reserve levels, and they need to exercise restraint in drawing them down now," she said.
Bair gave her quarterly assessment of the industry just before rushing off to attend only the second meting of a new council of regulators designed to curb undue risk-taking by financial institutions.
The Financial Stability Oversight Council (FSOC) took a step on Tuesday toward bolstering supervision of certain derivatives clearinghouses and giving them access to the Federal Reserve's emergency lending facilities.
A Treasury official also updated panel members on a regulatory investigation of foreclosure practices, with banks and other mortgage servicers under fire for sloppy documentation.
"The bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in the foreclosure process," said Michael Barr, assistant Treasury secretary for financial institutions.
The FDIC's quarterly report card on the banking industry's third quarter performance showed both profit growth, which was partly due to reduced loan-loss provisions, and an increasing divergence between the nation's mega-banks and its smaller ones.
The FDIC reported aggregate industry earnings rose to $14.5 billion in the third quarter versus $2 billion a year earlier. Profits would have been up sequentially from the second quarter, as well, if not for a massive charge-off recorded by the industry's largest player, Bank of America.
The number of banks on the regulator's "problem list" hit its highest level since 1993, despite better loan performance, while loan-loss reserves fell for the first time since late 2006, mostly due to large banks' actions, the agency said.
"Bair's comments are aimed primarily at mid-sized and smaller banks that have yet to show consistent credit quality improvement. This supports our broad thesis that the very large banks are improving much faster than the rest of the industry," said MF Global financial services analyst Jaret Seiberg.
RISK COUNCIL GATHERS
As head of the FDIC, Bair is a member of the new risk oversight council, an inter-agency panel of regulators created to keep an eye on precisely the sort of broad risk that might be posed by lower loan-loss reserves.
The council, set up under sweeping banking and Wall Street reforms enacted in July, met behind closed doors on Tuesday, then held a brief open session later in the day.
Almost four months since Democrats and President Barack Obama pushed through the reforms over the opposition of banks and Republicans, government regulators are consumed with the implementation of hundreds of new rules and regulations.
Industry lobbyists are moving to soften the Dodd-Frank law at the implementation level, where Congress left reams of important details to be hammered out by federal authorities.
The FSOC is empowered to tag certain organizations as "systemically important" to the stability of the economy. Firms thus labeled must answer to stricter oversight.
The council last month began sketching out the criteria it will use for deciding which non-bank financial firms get named as "systemically important." It did the same on Tuesday for exchanges, clearinghouses and data repositories that are being set up for off-exchange derivatives trading.
These institutions constitute the critical internal workings of the U.S. financial system. For them, the "systemically important" label also would bring access to the Federal Reserve's discount window during a liquidity crunch.
The council, led by Treasury Secretary Timothy Geithner, has 10 voting members.
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