Evan Soltas
Jul 11, 2012

Why Banks Are (Still) Struggling

Three years have passed since the United States exited recession -- but the banking sector is hardly celebrating. It remains weak, barely recovering from the depths of financial crisis in 2008.

The after-effects of it all linger: the real value of all lending by commercial banks has not grown on net since 2007. The deleveraging of mortgage debts has continued at massive scale, outweighing two major other forms of lending, consumer credit and commercial and industrial loans, which have seen a significant recovery.Although delinquency rates across all bank loans have fallen from 7.5 percent to 5.3 percent, none of the improvement has come from where it must -- residential mortgages -- if lending will be ever in a position to facilitate recovery in housing markets. Delinquency rates on such loans, which rose fiercely amid the recession, remain stubbornly high in the 10 percent range. The lack of progress comes in spite of action from both fiscal and monetary policy authorities to right the ship through refinancing, writedowns, and credit easing.

Instead, all of the progress on the headline delinquency rate has come from the other sources of debt. Delinquency is back to its pre-recession lows for commercial and industrial loans, as well as for consumer credit. Credit card delinquency is well below their pre-recession levels due to new government policy, and even delinquency on commercial real estate loans has experienced rapid improvement in recent quarters. The problematic outlier is residential real estate.There is likely a need for significantly more charge-offs of residential mortgage debt. In 2010, when banks were writing down their debts most sharply, charge-off rates for residential mortgages rose to just below 3 percent. That was roughly the same as commercial real estate loans and business loans -- hardly enough, given the position of residential mortgages at the center of the crisis, to resolve the problem.(Charge-off rates for credit cards and consumer credit are not shown in the graph above because they are structurally higher; see here.)

The weak economy restrains the banks' return to health. Slow growth means scarce business opportunities, even fewer to which spooked and injured banks will lend money. And when the banks do open their vaults, the profits leave something to be desired. Average rates of return on equity and on assets for banks are both roughly a third lower than they were before the recession. Faster economic growth is in order if banks are to be able to lend again soon, and indeed for there to be any venture to which a loan can return a full measure of profit.