Banks Wait for Full Impact of Low Energy Prices: FDIC

By Jeff Bater

Aug. 30 — Noncurrent commercial and industrial (C&I) loans rose during April through June as banks grapple with the oil sector slowdown, but the full impact of low energy prices is likely yet to be seen, a regulator said.

The Federal Deposit Insurance Corp. (FDIC) released figures on C&I loans 90 days or more past due as part of a report on the earnings of banks it regulates that showed second-quarter profits increased to $43.6 billion as revenues rose and litigation expenses were reduced at some of the largest institutions.

Strong Loan Growth

Only two banks failed in the three-month period, the FDIC numbers said. The share of lenders that were unprofitable slipped to 4.5 percent from 5.8 percent a year earlier. The positive report on bank profits characterized loan growth among institutions as strong.

“Even with the economy less than robust, banks continue to see a steadily increasing demand for loans, particularly in business lending and commercial real estate,” James Chessen, the chief economist for the American Bankers Association, said in a statement.

Interest Rates

Historically low interest rates are encouraging borrowing, Chessen said. Those low rates have caused some banks to reach for yield, increasing their exposure to interest-rate risk and credit risk. Federal Reserve monetary policy is under scrutiny as industry waits for the expected tightening.

“Banks remain sensitive to interest rate risk as it becomes increasingly likely the Fed will resume the path toward a normalization of rates by year-end,” Chessen said. “The industry has been prepared for this for many years, and will adapt easily to any changes. The Fed’s rate-hike path will be slow, which will keep borrowing costs down and lending up.”

Oil Patch Trouble

While profits and loan balances increased, banks continued building their reserves. The FDIC said the $11.8 billion in loan loss provisions added to reserves exceeded the $10.1 billion in net charge-offs subtracted from reserves.

C&I loans accounted for much of the increase in charge-offs. Noncurrent C&I loans — those 90 days or more past due or in nonaccrual status — rose for a sixth straight quarter. But the increase wasn't as sharp as the first-quarter jump, which was driven by strain in energy-sector C&I loans (106 BBD, 6/2/16).

“Persistent stress in the energy sector has resulted in a decline in asset quality at banks that lend to oil and gas producers, as well as banks that serve local economies reliant on the energy sector,” FDIC Chairman Martin Gruenberg said in a news briefing. “We likely have not yet seen the full impact of low energy prices on the banking industry, particularly for consumer and C&I loans in energy-producing regions of the country.”

Insurance Premiums

The agency said its fund for insuring deposits of member banks rose by $2.8 billion during the second quarter, climbing to $77.9 billion at the end of June from $75.1 billion at the end of March. The increase was driven largely by $2.3 billion in assessment income. The reserve ratio of the insurance fund rose to 1.17 percent during the quarter from 1.13 percent.

Under FDIC regulations, once the reserve ratio exceeds 1.15 percent, lower regular assessment rates go into effect. The agency said the range of initial assessment rates for all institutions declines to between 3 cents and 30 cents per $100 of the assessment base, from between 5 cents and 35 cents.

The FDIC expects premiums to decline for 93 percent of institutions with less than $10 billion in assets — that is, community banks.

“On average, regular quarterly assessments are expected to decline by about one-third for these smaller institutions,” the FDIC said in a news release. “The improvement in the Deposit Insurance Fund since the financial crisis reflects progress in implementing the long-term fund management plan put into place by the FDIC in the post-crisis period, as well as improving conditions in the banking industry.”

Banks with $10 billion or more in assets pay a surcharge to bring the reserve ratio to the statutory minimum of 1.35 percent by Sept. 30, 2020 — a Dodd-Frank requirement (51 BBD, 3/16/16). Small banks will receive assessment credits for the portion of their assessments that contribute to the increase to 1.35 percent.

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Seth Stern at

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