Deficits, Dollar, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn, Taxes, Treasury, Trust

Why You Cannot Keep the Banks Down–a Five Year Perspective

By Jim Boswell, author of Crush Depth Alert

Earlier this week I reported on how the bank trend in delinquencies (nonperforming assets) had peaked and over the next 2-3 three years are likely to return to pre-recession levels. Today, I would like to share with you how resilient the banks have been through the recession and how they are paying off the $400-$500 billion bill for their poor lending practices earlier in the decade.

The best way to gain a perspective of this is to review a five year (pre-recession, recession, and post recession) history of the banking industry financial statistics as reported to the Federal Deposit Insurance Corporation (FDIC). Exhibit 1 provides such a perspective by showing several important financial indicators from the composite banking net income and balance sheets for the period 2006-2010.

Exhibit 1:

Bankers know how to spread their losses around, mostly to others.

Interestingly, Exhibit 1 shows us how the banks are using three primary different ways to pay the bill for helping cause the Greatest Recession Since the Great Depression, while leaving one other option—reducing bank salaries/benefits/bonuses—somewhat untouched. The three primary methods the banks are using include the following:

1. Borrow funds at a cheaper rate from the Government, then pass less of that rate decrease on to the customer;
2. Write off all of their losses and recover a good portion by paying lower taxes; and
3. Pay fewer dividends to the stockholders.

Using the above strategy the banks have been able to pass on most all of their losses to customers, taxpayers, and stockholders without having to take a hit on their salaries, bonuses, and other such benefits. While using the above strategy the banks have been able to increase their equity and reducing the amount of loans they make and manage.

Now understanding this, who would like to step up and say bankers do not know what they are doing? Bankers are not stupid; they know as well as anyone how to have others pay for their mistakes, and the FDIC information proves it.

Now let’s look at these items one by one as shown by the FDIC data in Exhibit 1.

Net interest income at the banks is up nearly $100 billion in 2010 alone compared to 2006. Although net interest expense from borrowing has decreased by $200 billion in 2010 compared to 2006, net interest income from lending has dropped less than $100 billion. In fact, net interest income has been up every year since 2006 and that line item accounts for another $100 billion of income by totaling 2007-2009 figures compared to the baseline year of 2006.

Moving on. Non-interest income, which is made up of income from bank fiduciary activities, service charges, and trading account fees, has remained fairly steady. Non-interest expense, which consists of salaries and employee benefits and premises and equipment expenses, has risen by about $50 billion since 2006. Therefore, in total non-interest bank expenditures have increased during the recession. Note also at the bottom of Exhibit 1 that banking salaries have not taken a hit during the recession. Hmmm.

Losses written off (Provision for losses) on the tax books of the banks as shown in Exhibit 1 have resulted in the banks paying nearly $100 billion less in taxes over the last three years compared to pre-recessionary times. In fact, without these losses the banks would be showing more income and paying more taxes in each of the last two years (2009, 2010) than was made and paid in 2006.

Dividends to the stockholders? Down over $150 billion since the recession began.

So by passing fewer dividends on to their stockholders, paying fewer taxes to the Government, and passing fewer of the Government interest rate benefits on to their customers, the banks are crawling back slowly but surely to pre-recessionary times. The chosen approach for the banking industry seems a bit ironic in a way, but that is the way it works in the world of big finance—everyone but the perpetrator seems to pay the bill.

And with that I will leave the reader with one final offering. If you truly want to know which banks are in trouble, then ask for a free copy of my Quanta Analytics List of Problem Banks for 2010 and Beyond by contacting me at

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward.

You can purchase Crush Depth Alert here.


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