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The FDIC reports that banks are doing quite well, despite all the complaining that goes on in the industry. The federal regulatory agency says that if banks were to loosen their credit standards, they could help fuel the recovery. That might not be a bad public-relations move for an industry that takes the brunt of the blame for the recession.

“2011 represented the second full year of improving performance by the banking system,” said Martin Gruenberg, Acting Chairman of the FDIC, in a prepared statement announcing the release of the most recent Quarterly Banking Profile. “Banks reported higher aggregate earnings, the numbers of ‘problem’ banks and failures declined, and loan balances increased in the final three quarters of the year,” he said.

The latest Quarterly Banking Profile, for the fourth quarter of 2011, is full of good news. Banks earned $26.3 billion last quarter, about $5 billion more than they earned that same quarter in 2010. Around 63 percent of banks had higher net income than a year prior, and fewer banks reported net losses — only 18.9 percent compared to 27.1 percent last year.
Loan loss releases, a leading indicator?

Loan loss releases were the main driver of these improvements, according to the FDIC, which is a good sign but no reason to celebrate. Banks keep loan loss reserves to protect liquidity in the event of defaults on loans. They keep more when they expect more defaults. By releasing reserves, banks are likely indicating that their outlook is improving — or that they’ve gotten a lot of bad debt off their books.

On the other hand, this also means that the bulk of banks’ profitability increases came not from new business, but from accounting maneuvers.

That said, Gruenberg thinks the mild recovery presents an opportunity for banks. While he acknowledged that significant downside risk still remains, he stated that “the industry is now in a much better position to support the economy through expanded lending.”
Tight credit, slow recovery

Credit is still very tight right now, which some blame for the plodding pace of the recovery. Just today when Ben Bernanke testified to Congress, he explained that tight credit will hinder our recovery this year. Banks are therefore in a unique position to help speed things up . Someone has to move first, and it may have to be the banks, even if it looks risky.

If the FDIC, which would pay the price if banks get this wrong, think it’s a good idea, maybe they should listen.

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