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4 Charts That Show How Different the Banking Industry Is Today From the Great Recession

By Bram Berkowitz – Aug 31, 2020 at 7:04AM

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The banking industry seems better prepared for loan losses and is more profitable than it was during the Great Recession.

The Federal Deposit Insurance Corporation recently posted its second-quarter banking profile, a snapshot of earnings results for all banks insured by the FDIC that provides an overview of how the industry is performing as a whole. Given how much stress the coronavirus pandemic has put on the economy, and the recession the country finds itself in, the FDIC's quarterly profile is a good way to compare the industry now to what it was like during the Great Recession.

And this time around, despite a much different situation, the industry seems like it is in a much better place to deal with a recession. "Although economic stress related to the COVID-19 pandemic continued to affect bank earnings, the industry has remained a source of strength for the economy," FDIC chair Jelena McWilliams said in a statement. Here are four charts that illustrate how much stronger the banking industry is now compared to 2008 and 2009 during the height of the Great Recession.

The exterior of a bank.

Image source: Getty Images.

1. Banks are better prepared for loan losses

Reserve Coverage Ratio

Image source: FDIC.

There is a lot going on in this chart, but overall it shows just how much better the banking industry is prepared for future loan losses. As you can see, in mid-2009 non-current loans (those that banks hadn't received a payment on in at least 90 days) reached more than $400 billion in total volume, but the industry had only set aside about $250 billion in reserves to cover those loans. That gave the industry a coverage ratio that was just a little higher than 0.60%. Fast forward to the second quarter of 2020 and banks have set aside a similar level of reserves to cover only about $125 billion of non-current loans, for a much stronger coverage ratio of more than 2%, which is a lot more, given that we are talking in hundreds of billions of dollars.

To be fair, I think the non-current loan number is skewed by all of the government intervention including $1,200 stimulus checks, the Paycheck Protection Program, and enhanced unemployment benefits. Many bank executives have said on earnings calls they believe significant losses will materialize down the line, but the banking industry is still much better capitalized than it was during the Great Recession, and I believe it's thinking much more holistically about potential losses as well.

2. Banks are more profitable

Quarterly Net Incom

Image source: FDIC.

Another good sign for investors is that banks so far have been much more profitable during this deteriorating economy. Profits in each of the first two quarters of the year almost reached $20 billion. During the back half of 2008 and most of 2009, the industry saw much lower profits and sometimes suffered losses -- approaching a loss of $40 billion in what appears to be the first quarter of 2009. There were also positive gains on securities in the quarter, which contributed to the losses during the Great Recession. The ability to stay profitable in the second quarter when rates were at zero, the GDP contracted nearly 33%, and banks collectively set aside tens of billions to cover potential loan losses is impressive. Profits, however, may continue to wane as the low-rate environment could continue to result in smaller margins on loans.

3. There's more trust in the banking industry

Quarterly Deposits

Image source: FDIC.

This year, as the economy began to deteriorate and markets saw high volatility, deposits surged at banks. As you can see above, deposit inflows increased by $1.2 trillion in the first quarter of 2020, and more than $1 trillion in the second quarter. According to the FDIC, deposits were 21% higher at the end of the second quarter compared to the end of the second quarter of 2019, the highest ever annual growth rate seen in an FDIC quarterly banking profile. While the growth can be attributed to many factors, McWilliams said "these inflows demonstrate public confidence in the banking system, as well as the system's ability to accommodate unprecedented customer demand." 

4. Fewer banks are in trouble

Problem Banks FDIC

Image source: FDIC.

There are also fewer financial institutions on the FDIC's "problem bank list" this time around. As you can see above, the level now is lower than it was in 2008 before the list started to grow rapidly. It's near historic lows, according to the FDIC, and has been stable since 2018. This list could certainly swell depending on how long the pandemic lasts and if there's another period of lockdowns, but it's also managed to stay at this level through the first few difficult quarters of the pandemic.

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