As pressures rise, head of FDIC reassures depositors: 'Banks are safe'

Anytime the economy starts to sputter, it's natural to turn a wary eye toward banks. The most recent recession in 2007 and 2009 was centered in the housing and financial sectors, and banks suffered heavily with loan losses and failures.

Jelena McWilliams, chair of the Federal Deposit Insurance Corp., or FDIC, doesn't see pressures surfacing with the same intensify now, but she concedes many banks could face tough times ahead if the economy doesn't start to mend fairly soon.

Not only are loan losses likely to rise, but banks are earning less on their lending activities owing to lower interest rates, and a new accounting rule is forcing many to set aside higher reserves to cover losses, reducing profits in the process.

"So far so good, but the question is how long the recovery takes," said McWilliams in an interview with The Arizona Republic after having visited, virtually, with members of the Arizona Bankers Association. "The sooner people get back into jobs, the better."

Arizona situation not unusual

Banks with high loan concentrations in certain hard-hit industries including lodging,  retail and tourism could feel the brunt more than others. Arizona has had its share of business stress in those and other areas, but McWilliams said she wasn't aware of any specific problems for banks operating in the state.

"There's nothing that jumps out" about Arizona banks, she said.

That said, banks around the country are struggling as collapsing interest rates narrow the spread between what they earn on loans and pay in deposits.

That's in addition to a new accounting rule that already is leading to large loan-loss charges and lower earnings. The new rule requires banks to estimate credit losses over the lifetimes of their loans, not just as losses accrue. 

New accounting rule an issue

McWiliams earlier this year sent a letter requesting that the Financial Accounting Standards Board, an independent body, delay implementation of the new accounting rule, though to no effect so far.

"It's a significant hit (in terms of profits), and it couldn't have come at a worst time," she said, citing the coronavirus pandemic and business-closing actions that have pushed the economy into recession, along with the income squeeze due to lower interest rates. 

For the first quarter, Chase, Wells Fargo and Bank of America — the big three banks operating in Arizona — included roughly $17 billion in combined provisions or charges for credit losses, well above the $3 billion or so they had reported one year earlier. Their combined profits fell to about $6 billion from $21 billion.

Bank pressures ahead

The FDIC next week will report on the financial state of the banking industry. Some big banks already have disclosed large profit drops, partly due to the accounting change. McWilliams said it's not yet clear how significant the impact will be from the new credit-loss provisions.

On the plus side, bank failures have dwindled to a trickle, and just 51 FDIC-insured banks — about 1% of the total — are on the agency's problem-bank list. Plus, the FDIC fund that protects depositors against losses now counts about $110 billion, a record high, she said, adding that the FDIC also considers bank capital, liquidity and other financial measures to be in good shape.

"Banks are safe," she said. "There are no concerns for depositors."

Reach the reporter at russ.wiles@arizonarepublic.com.