Economy Continues to Punish Banks

The bad news continues for banks. The economy is stagnating, and profit-making opportunities are sparse, The Wall Street Journal reports.

"If you had asked any of us three or four years ago how bad it could get, we would have missed it by a couple of hundred percent," Michael Sanchez, chief executive of Coastal Banking, based in Beaufort, S.C., told the Journal. "It just couldn't be more challenging."


Banks face weak loan demand at the same time that they are curbing their riskier lending. New regulations they must follow to lessen risk are cutting into their profits. As for loan demand, both consumers and businesses are working to cut their debts rather than taking on new ones.


Bank earnings jumped 38 percent in second quarter from a year ago, according to the Federal Deposit Insurance Corp. But that was the smallest gain in nearly two years. In addition, most of the increase came from funds that were no longer needed to cover banks’ bad loans rather than from any activity on their part.


The government sued 17 banks last week, seeking billions of dollars for mortgage investments that went sour. And the mortgage morass will constrain earnings for years.


For the biggest banks, which have major investment banking and trading operations, the recent financial market volatility has been troublesome. And the Dodd-Frank financial reform law limits how much money they can make from proprietary trading.


Star bank analyst Richard Bove of Rochdale Securities told CNBC that the government’s bank policies may well throw the economy bank into recession.


The government wants to break up the country’s biggest banks, he said. "It wants to see a spreading of the risks across the banking industry. The fact of the matter is it doesn't seem to care what it's doing to the economy."