Banking Profits Grow Amid Calls for Regulatory Relief

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By Jeff Bater

Bank profits grew nearly 5 percent in 2016, according to a report giving an upbeat appraisal of an industry President Donald Trump is focusing on as part of a larger deregulatory agenda.

Banks and thrifts insured by the Federal Deposit Insurance Corporation (FDIC) reported $171.3 billion in net income for the year, which was $7.9 billion more than lenders earned in 2015, the agency said in its quarterly profile of the industry.

Largely Positive

“Fourth quarter and full-year 2016 results were largely positive for the banking industry,” FDIC Chairman Martin Gruenberg said at a press briefing on the report Feb. 28. “Revenue and net income were higher, loan balances grew, asset quality improved, and the number of unprofitable banks and ‘problem banks’ continued to fall.”

Still, not all is rosy for the industry. Gruenberg said low interest rates over the years have led some institutions to reach for yield, which has increased their exposure to interest-rate risk, liquidity risk and credit risk.

”The industry continues to face challenges,” he said. “Margin pressures have led some institutions to ‘reach for yield’ through higher-risk assets and extended asset maturities. Banks must manage their interest-rate risk, liquidity risk, and credit risk carefully for industry growth to remain on a long-run, sustainable path. These challenges will continue to be a focus of supervisory attention.”

Regulatory Relief

The continuing recovery by banks from the crisis unfolds as Republicans consider regulatory relief for the industry. The Trump administration and GOP lawmakers blame the Dodd-Frank Act and government regulations for stifling economic growth.

During a meeting in January with small-business owners, Trump promised to do “a big number” on Dodd-Frank. He said the law had damaged the country’s entrepreneurial spirit and limited access to needed credit, calling it a “disaster.”

The FDIC data supported a recent statement by Federal Reserve Chairman Janet Yellen that the industry is doing well. Yellen, in an appearance before the Senate Banking Committee on Feb. 14, said U.S. banks are generally considered quite strong relative to their international counterparts. She characterized lenders as “very well capitalized,” gaining market share and “quite profitable.”

Loan Balances on Rise

The FDIC report Feb. 28 said banks and thrifts reported net income of $43.7 billion in the fourth quarter of 2016, up $3.1 billion, or 7.7 percent, from the same period a year earlier. Total loan and lease balances increased $72.3 billion, or 0.8 percent, during the quarter, with increases in credit card balances, real estate loans secured by nonfarm nonresidential real estate properties, and real estate construction and development loans.

Lenders classified as community banks did particularly well in the last three months of 2016, reporting a 10.5-percent increase in net income, the FDIC data showed.

Small banks have been pushing Congress for years to lighten the burden that’s amassed from too many rules. The good health of banks evidenced by the FDIC report isn’t likely to silence calls for policy relief.

“Regulatory pressures and greater capital requirements were challenges that helped drive 251 banks to merge in 2016,” James Chessen, chief economist of the American Bankers Association, said in a statement on the report. “While the industry’s solid performance as a whole demonstrates a very resilient banking system, the underlying regulatory pressures driving community banks to sell or merge can’t be ignored. A tailored system of regulation would go a long way toward allowing banks of every size to be successful in their communities.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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