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Can the banking industry earn its way back to good health?  In the long run, sure.  But in the short run, things don’t look so hot.  Here’s today’s press release from the FDIC:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate net loss of $3.7 billion in the second quarter of 2009, a decline of $8.5 billion from the $4.8 billion in profits the industry reported in the second quarter of 2008.

….Indicators of asset quality continued to worsen during the second quarter. Both the quarterly net charge-off rate and the percentage of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) reached the highest levels registered in the 26 years that insured institutions have reported these data.

….”Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses,” Chairman [Sheila] Bair noted. “Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago.”

There’s a vicious circle at work too.  As more banks go under, the FDIC has to assess higher fees to banks to keep its insurance fund solvent.  Those higher fees depress profits, which in turn keeps the industry underwater.  That’s part of what happened this quarter: if it weren’t for a special assessment of $5.5 billion the industry would have shown higher earnings.

Bank health, like employment, is a lagging indicator, so today’s report doesn’t necessarily mean the economy isn’t starting to improve.  But the fact that loan quality continues to deteriorate and writeoffs continue to skyrocket sure isn’t good news.  If unemployment stays at 10% or above for the next year, as the CBO now projects, this isn’t going to turn around any time soon.

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