Banking Industry Faces Quarterly Loss
The U.S. banking industry may suffer a net loss for the quarter ending June 30 because of billions of dollars in foreign debts that are not being repaid, federal bank regulators said Monday.
The huge loss reserves being set aside by a handful of big money-center banks may be enough to offset profits in 14,000 other mostly profitable institutions, the regulators said.
“The amounts they’re allocating for reserves, just in the second quarter, are so tremendous that the aggregate net income for the industry will be around zero,” said John Quinn of the Federal Deposit Insurance Corp. He later said that he would not be surprised by a net loss.
And FDIC Chairman William Seidman said it appears that this “will be the worst quarter in history” for the commercial banking industry, in both the rate and amount of earnings decline.
Ironically, the loss would follow a first quarter in which the industry earned a record high $5.3-billion profit. But in recent weeks, four of the nation’s top lenders set aside $5.5 billion in loss reserves against their Third World loans.
Citicorp led the parade on May 19, setting aside $3 billion against possible losses on its loans to Brazil. Citicorp said that it would declare a $2.5 billion net loss for the quarter because of the decision.
Chase Manhattan Corp., Security Pacific Corp. and BankAmerica Corp. followed suit. More banks are reported to be considering the bitter pill.
But Seidman said that once those actions are completed, bank performance should improve and he predicted significant recovery during the second half of the year.
The FDIC officials made the comments as they released their quarterly banking profile for the first three months of 1987. Quinn said one reason for predicting the loss was to begin preparing the public for the news in hopes of forestalling any panic when the second-quarter report is released in September.
He noted that fewer than 25 big central banks are heavily involved in foreign lending. But there are more than 14,000 FDIC-insured banks in the nation, and more than 12,000 made a profit in the first quarter of the year. The FDIC insures deposits up to $100,000.
