Banks Earn Record Profits Thanks to Falling Rates

Profits at the nation’s banks nearly tripled in the last quarter of 1992, federal regulators said Tuesday, enabling the industry to chalk up its best year ever as banks capitalized on falling rates paid to depositors.

The nation’s 11,461 commercial banks earned $8.2 billion last quarter, up from $3.0 billion in the final 1991 quarter, the Federal Deposit Insurance Corp. said in a report likely to calm lingering fears of a bailout for banks.

For the year, bank profits surged 80% to a record $32.2 billion, from $17.9 billion in 1991, aided by the need to set aside less money as a cushion for problem loans.

The previous record for bank profits was $24.8 billion in 1988, and the FDIC now is gearing up to cut its estimates for likely bank failures in 1993.

Acting FDIC Chairman Andrew Hove called the 1992 results “extraordinary,” saying they make it “more and more unlikely the public will have to pick up the bill for bank failures.”

Big banks in the Northeast and the West--which have suffered from souring loans, especially in depressed real estate markets--showed the biggest earnings gains.

“There’s recovery in sight everywhere,” said David Cates, research director of the Cates Bank Rating Service.

The FDIC said profits were boosted by the favorable spread for banks between the interest rates they earned on loans and other assets, and the rates they paid to depositors.

That gap widened throughout 1992 to historic levels as interest rates tumbled, forcing down yields on deposits. Rates charged by banks for loans, by comparison, fell less sharply.

FDIC officials also said depositors are moving out of longer-maturing certificates of deposit into short-term instruments such as money market accounts that yield less but offer consumers more flexibility to move funds around.

What’s more, banks set aside far less money for troubled loans to guard against future losses, as problem loans fell. Provisions for loan losses plunged 40% last quarter, to $6.4 billion from $10.6 billion a year earlier.

For all of 1992, provisions shrank to $25.9 billion, the lowest level in four years and down from $34.3 billion.

“During the year, banking went off the critical list and took important steps toward recovery,” Hove told a press conference, saying the industry had moved beyond the crisis it faced when bank failures topped 200 a year in the late 1980s.