Bank Loan Underwriting Standards Largely Unchanged

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Office  of the Comptroller of the Currency

OCC News Release: OCC Survey Showed Banks' Underwriting Standards Largely Unchanged

WASHINGTON — The Office of the Comptroller of the Currency’s 18th Annual Survey of Credit Underwriting Practices, released today, shows that underwriting standards remained largely unchanged from last year, although some easing was noted in select commercial and retail products.

Banks continued to react to changing economic conditions, competition, and ongoing portfolio risk. Examiners reported banks that eased standards generally did so in response to changes in economic outlook, competitive environment, and the bank’s risk appetite including a desire for growth. Large banks, as a group, reported the highest share of eased underwriting standards. Loan portfolios that experienced the most underwriting easing included indirect consumer, credit cards, large corporate, asset-based lending, and leveraged loans. Loan portfolios that experienced the most underwriting tightening included high loan-to-value home equity, international, construction, and residential real estate loans.

“This year’s survey showed the continued normal progression toward stable or easing underwriting standards as the economic environment stabilizes,” said John Lyons, Senior Deputy Comptroller and Chief National Bank Examiner. He went on to indicate “examiners will be focusing on underwriting standards as banks ease standards to improve margins and compete for limited good loans.”

Banks should ensure appropriate attention to underwriting, loan structures, and loan administration as competition and the anxiety for earnings can lead to heightened risk. This is especially notable for loan products that have already seen easing such as leveraged lending, asset-based lending, indirect consumer lending, and credit cards.

The survey is a compilation of examiner observations and assessments of credit underwriting standards. The 2012 survey included 87 of the largest national banks and federal savings associations and covers the 12-month period ending February 29, 2012. The aggregate total of loans was $4.6 trillion as of December 31, 2011, which represents approximately 91 percent of total loans in the national bank and federal savings association system.

Survey of Credit Underwriting Practices

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Federal Reserve: "Economy has been expanding moderately"

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Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve

Federal Reserve Issues FOMC statement

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.

Press Conference with Chairman of the FOMC, Ben S. Bernanke

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Federal Reserve Lowers USA GDP Projections

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Bank Failure Friday: FDIC Seizes 3 Banks!

The FDIC closed 3 banks on Friday, June 15, 2012. Total bank failures for 2012 increased to 31. Total credit union failures for 2012 remain at 7.

#29 Putnam State Bank, Palatka, FL
* Harbor Community Bank, Indiantown, FL assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $169.5 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $37.4 million
* The last bank closed in the state had been Security Bank, NA, North Lauderdale, on May 4, 2012

#30 Security Exchange Bank, Marietta, GA
* Fidelity Bank, Atlanta, GA assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $151.0 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $34.3 million
* The last bank closed in the state had been Covenant Bank & Trust, Rock Spring, on March 23, 2012

#31 The Farmers Bank of Lynchburg, Lynchburg, TN
* Clayton Bank and Trust, Knoxville, TN assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $163.9 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $28.3 million
* The last bank closed in the state had been Tennessee Commerce Bank, Franklin, on January 27, 2012

States where banks have been seized by the FDIC in 2012 (in alphabetical order): Alabama 1, California 1, Florida 4, Georgia 5, Illinois 4, Indiana 1, Maryland 2, Michigan 1, Minnesota 3, New Jersey 1, North Carolina 1, Oklahoma 1, Pennsylvania 1, South Carolina 2, Tennessee 3. Georgia and Florida accounted for 36 total or 39% of all bank failures in 2011.

USA Failed Banks by Year Bank failures skyrocketed in 2009 and 2010 to 140 and 157, respectively - a 2-year total of 297 compared to 32 from 2004 through 2008. Bank failures in 2011 continued at a high rate of 92. The 2012 annual bank failures are extrapolated from the weeks reported and failures year-to-date. The total 2012 closings are currently estimated at 67.





Failed Credit Unions The National Credit Union Administration (NCUA) has seized 7 credit unions in 2012:
1 is in conservatorship and managed by the NCUA
* A M Community Credit Union of Kenosha, WI
4 have been liquidated and sold
* Telesis Community Credit Union of Chatsworth, CA
* Wausau Postal Employees Credit Union of Wausau, WI
* Saguache County Credit Union of Moffat, CO
* People Community Development Credit Union of Philadelphia, PA
1 has been liquidated and merged
* Eastern New York Federal Credit Union of Napanoch, NY
1 has been liquidated and closed
* Shepherd’s Federal Credit Union of Charlotte, N.C.

States where credit unions have been seized by the NCUA in 2012 (in alphabetical order): California 1, Colorado 1, New York 1, North Carolina 1, Pennsylvania 1, Wisconsin 2.



FDIC Deposit Insurance Fund: Cost of Failed Banks The total estimated cost to the FDIC Deposit Insurance Fund for the 2012 bank closures year-to-date is $1.72 billion.



The most costly banks to the Deposit Insurance Fund (DIF) in 2012 year-to-date:
1 Tennessee Commerce Bank, Franklin, TN $416.8M
2 The First State Bank, Stockbridge, GA $216.2M
3 Inter Savings Bank FSB, Maple Grove, MN $117.5M
4 Fidelity Bank, Dearborn, MI $92.8M
5 First Guaranty Bank & Trust Company of Jacksonville, Jacksonville, FL $82.0M
6 Plantation Federal Bank, Pawleys Island, SC $76.0M
7 BankEast, Knoxville, TN $75.6M
8 Central Bank of Georgia, Ellaville, GA $67.5M
9 Premier Bank, Wilmette, IL $64.1M
0 Waccamaw Bank, Whiteville, NC $51.1M

$XLF

Infiltrating the JPMorgan Mafia Hearings in Congress!

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Wall Street Bankster and Con Artist: JPMorgan CEO Jamie Dimon

Lauren Lyster and Heidi Moore Infiltrate JP Morgan's Mafia Hearings in Washington DC!

Welcome to Capital Account. We come to you live from our bunker deep within the newsroom's "fortress balance sheet," because Jamie Dimon was on Capitol Hill testifying about JP Morgan's multi-billion dollar trading loss. We headed to the hill with the protection of a full body suit that repels cronyism and dirty deals...we tried to enter through a revolving door so as not to raise any eyebrows, but there was not one to be found! Perhaps this is only for the seasoned politicians. In any case, Lauren did manage to infiltrate the Capitol one way or another, and she brings you the real story from inside the lion's den!

Now, we were hoping we would see a repeat of the Valachi mafia hearings of the 1960s, where the country really got some insight into the workings of organized crime: the mafia. Because, as our guest Wall Street correspondent for Marketplace Heidi N. Moore put it, "the mafia has better disclosure than the banking industry." Sadly, this type of scrutiny was not applied to Jamie Dimon today. Instead, what we saw was lawmakers who have JP Morgan to thank as a major contributor, asking Jamie Dimon how they should better regulate JP Morgan! We interview Marketplace's Heidi Moore on Capitol Hill, fresh from the hearings, to assess everything of value that came out of the Don's deposition!

Plus we're wondering if Banker Bonus Arbitrage is upon us, when "toxic" assets unloaded on bankers turn out to be the gift that keeps on giving. Or perhaps are we seeing a breed of genetically mutated bank executives, who are the only ones that can digest toxic assets? Either way, we had to ask after a Reuters report raised a few eyebrows around the Capital Account studio. Demetri and Lauren give you their take on our segment of Loose Change.

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USA Banks Loan Charge-Offs Drop to 4-Year Low

The USA Banks Loan Charge-Off Rate of +1.17% for the quarter ended March 31, 2012 indicates the substandard loans on the books have been mostly worked off. Total Loans decreased by -0.8% from the prior QE December 31, 2011. However, banks are more risk-averse than before the 2008 USA financial system crisis and the Great Recession that officially ended the QE June 30, 2009. Therefore, Loan Charge-Offs should continue to decline as loan underwriting standards are more conservative. The Net Charge-Off Rate is still high compared to historical rates.

USA Banks Net Charge-Off Rate by Quarter The USA Banks Net Charge-Off Rate decreased to 1.17% for quarter ended March 31, 2012, which was the lowest since the QE March 31, 2008 at 0.99%. The Net Charge-Off Rate peaked at 2.89% for the QE December 31, 2009, during the USA financial system crisis.




USA Banks Net Charge-Off Rate by Segment For the 3 months ended March 31, 2012, the Net Charge-Off Rates by segments were:
All institutions +1.17%
Credit card banks +4.18%
International banks +1.48%
Agricultural banks +0.17%
Commercial lenders +0.76%
Mortgage lenders +0.95%
Consumer lenders +1.55%
Other specialized (< $1 billion total assets) +0.25%
All other (< $1 billion total assets) +0.37%
All other (> $1 billion total assets) +1.01%

Loan Losses Improve in All Major Loan Categories (FDIC Quarterly Banking Profile, May 24, 2012) Loan losses declined from year-ago levels for a seventh consecutive quarter. Net charge-offs (NCOs) totaled $21.8 billion in the first quarter, the lowest quarterly total in four years, and $11.7 billion (34.8 percent) less than in first quarter 2011. Charge-offs were lower in all major loan categories. The largest year-over-year declines were in credit cards, where NCOs fell by $4.3 billion (37.7 percent), in real estate construction and land loans, where NCOs were $1.8 billion (60.6 percent) lower, and in commercial and industrial (C&I) loans, where NCOs declined by $1.5 billion (44.4 percent).

USA Banks Return on Assets Rise to Post-Crisis High

FDIC Deposit Insurance Fund Balance at 10-Quarter High

FDIC Problem Bank List Decreases to 9-Quarter Low

$XLF $DIA $SPY $IWM $QQQ

USA Banks Return on Assets Rise to Post-Crisis High

USA Banks Return on Assets of +1.02% for the quarter ended March 31, 2012 signals continued improvement in profitability and ongoing stability in the banking system. There were 7,307 financial institutions reporting. The prior year quarter, the QE 3-31-11, was +0.86%. The current ROA is the highest since the full-year 2006 (+1.28%).

Return on assets reflects the overall performance, and health, of the banking system and takes into account all of the income statement components, including net interest margins, loan loss provisions, operating expenses, and income taxes. Return on assets also indicates how effectively and efficiently assets are being deployed and if the asset mix is ultimately profitable. An ROA of +1.00% is a banking benchmark.

USA Banks Return on Assets by Year The USA Banks Return on Assets (ROA) was +1.28% for the years ended 2004, 2005, and 2006. The ROA decreased to +0.81% and +0.03% in 2007 and 2008. The ROA then turned negative to -0.07% in 2009, before rebounding to +0.65% in 2010 and +0.88% in 2011.



USA Banks Return on Assets by Segment For the 3 months ended March 31, 2012, the Annualized ROA by banking segments were:
All institutions +0.88%
Credit card banks +3.33%
International banks +0.85%
Agricultural banks +1.27%
Commercial lenders +0.84%
Mortgage lenders +0.81%
Consumer lenders +1.78%
Other specialized (< $1 billion total assets) +1.73%
All other (< $1 billion total assets) +1.00%
All other (> $1 billion total assets) +1.02%

Earnings Rise to Post-Crisis High (FDIC Quarterly Banking Profile, May 24, 2012) FDIC-insured commercial banks and savings institutions reported $35.3 billion in net income for first quarter 2012. This represents a $6.6 billion (22.9 percent) improvement over first quarter 2011 results, and is the highest quarterly net income reported by the industry since second quarter 2007. The average return on assets (ROA) rose above the 1 percent threshold for only the second time since second quarter 2007 (third quarter 2011 ROA was 1.03 percent). Quarterly net income has now improved year over year for 11 consecutive quarters. More than two-thirds of all institutions (67.5 percent) reported year-over-year improvement in their quarterly earnings, and only 10.3 percent were unprofitable, the lowest level since second quarter 2007.

FDIC Deposit Insurance Fund Balance at 10-Quarter High

FDIC Problem Bank List Decreases to 9-Quarter Low

FDIC Deposit Insurance Fund Balance at 10-Quarter High

The FDIC Deposit Insurance Fund (DIF) balance and related Provision for Insurance Losses (PIL) indicate continued improvement through the 3 months ended March 31, 2012. During the 2008 financial system crisis and the Great Recession, the Provision for Insurance Losses increased, and the DIF decreased, as a result of bank failures and the resulting costs of seizure and liquidation. However, the FDIC problem bank list remains very high which indicates ongoing bank failures and DIF costs. Bank failures and the related charts of total failures and cost to the FDIC Deposit Insurance Fund are posted weekly on this blog.

FDIC Deposit Insurance Fund by Quarter The FDIC Deposit Insurance Fund balance was +$15.3 billion at the quarter ending 3-31-12. This is the 4th consecutive quarterly positive balance, after 7 consecutive negative quarters, and a 13-quarter high. The peak balance was +$52.84 billion at QE 3-31-08. This was before the 2008 USA financial system crisis and Great Recession. The low balance was a negative -$20.9 billion at the QE 12-31-09. The Provision for Insurance Losses (PIL), the cost of seizing and liquidating failed banks, was a mere +$12 million at QE 3-31-12. The PIL peaked at +$21.7 billion for the QE 9-30-09. Prior to the QE 3-31-08, the PIL was an immaterial amount, positive or negative, of less than $100 million each quarter.




DIF Balance Continues Positive (FDIC Quarterly Banking Profile, May 24, 2012) The DIF balance increased in the first quarter to $15.3 billion (unaudited) from $11.8 billion (audited) in the fourth quarter, the ninth consecutive quarterly increase. Accrued assessment income added $3.7 billion. Interest earnings and unrealized gains on available-for-sale securities added $180 million, and all other income (net of expenses) added another $63 million. Operating expenses and insurance loss provisions subtracted $472 million, resulting in a first-quarter increase in the DIF balance of $3.5 billion.

FDIC Problem Bank List Decreases to 9-Quarter Low

Bank Failure Friday: FDIC Seizes 4 Banks!

The FDIC closed 4 banks on Friday, June 8, 2012. Total bank failures for 2012 increased to 28.  Total credit union failures for 2012 remain at 7.

#25 First Capital Bank, Kingfisher, OK
* F & M Bank, Edmond, OK assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $46.1 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $5.6 million
* The last bank closed in the state had been First National Bank of Davis, Davis, OK on March 11, 2011

#26 Carolina Federal Savings Bank, Charleston, SC
* Bank of North Carolina, Thomasville, NC assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $54.4 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $15.2 million
* The last bank closed in the state had been Plantation Federal Bank, Pawleys Island, SC on April 27, 2012

#27 Farmers’ and Traders’ State Bank, Shabbona, IL
* First State Bank, Mendota, IL assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $43.1 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $8.9 million
* The last bank closed in the state had been Premier Bank, Wilmette, IL on March 23, 2012

#28 Waccamaw Bank, Whiteville, NC
* First Community Bank, Bluefield, VA assumed all of the deposits and purchased most of the assets
* As of March 31, 2012, the bank had approximately $533.1 million in total assets
* FDIC estimates the cost to the Deposit Insurance Fund (DIF) will be $51.1 million
* The last bank closed in the state had been Blue Ridge Savings Bank, Inc., Asheville, NC on October 14, 2011

States where banks have been seized by the FDIC in 2012 (in alphabetical order): Alabama 1, California 1, Florida 3, Georgia 4, Illinois 4, Indiana 1, Maryland 2, Michigan 1, Minnesota 3, New Jersey 1, North Carolina 1, Oklahoma 1, Pennsylvania 1, South Carolina 2, Tennessee 2. Georgia and Florida accounted for 36 total or 39% of all bank failures in 2011.

USA Failed Banks by Year Bank failures skyrocketed in 2009 and 2010 to 140 and 157, respectively - a 2-year total of 297 compared to 32 from 2004 through 2008. Bank failures in 2011 continued at a high rate of 92. The 2012 annual bank failures are extrapolated from the weeks reported and failures year-to-date. The total 2012 closings are currently estimated at 63.





Failed Credit Unions The National Credit Union Administration (NCUA) has seized 7 credit unions in 2012:

1 is in conservatorship and managed by the NCUA
* A M Community Credit Union of Kenosha, WI

4 have been liquidated and sold
* Telesis Community Credit Union of Chatsworth, CA
* Wausau Postal Employees Credit Union of Wausau, WI
* Saguache County Credit Union of Moffat, CO
* People Community Development Credit Union of Philadelphia, PA

1 has been liquidated and merged
* Eastern New York Federal Credit Union of Napanoch, NY

1 has been liquidated and closed
* Shepherd’s Federal Credit Union of Charlotte, N.C.

States where credit unions have been seized by the NCUA in 2012 (in alphabetical order): California 1, Colorado 1, New York 1, North Carolina 1, Pennsylvania 1, Wisconsin 2.



FDIC Deposit Insurance Fund: Cost of Failed Banks The total estimated cost to the FDIC Deposit Insurance Fund for the 2012 bank closures year-to-date is $1.62 billion.



The most costly banks to the Deposit Insurance Fund (DIF) in 2012 year-to-date:
1 Tennessee Commerce Bank, Franklin, TN $416.8M
2 The First State Bank, Stockbridge, GA $216.2M
3 Inter Savings Bank FSB, Maple Grove, MN $117.5M
4 Fidelity Bank, Dearborn, MI $92.8M
5 First Guaranty Bank & Trust Company of Jacksonville, Jacksonville, FL $82.0M
6 Plantation Federal Bank, Pawleys Island, SC $76.0M
7 BankEast, Knoxville, TN $75.6M
8 Central Bank of Georgia, Ellaville, GA $67.5M
9 Premier Bank, Wilmette, IL $64.1M
0 Waccamaw Bank, Whiteville, NC $51.1M

Fed Chair Bernanke: USA economic growth has continued at a moderate rate

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Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve

Chairman Ben S. Bernanke
Economic Outlook and Policy Before the Joint Economic Committee, U.S. Congress
Washington, D.C. June 7, 2012

Chairman Casey, Vice Chairman Brady, and other members of the Committee, I appreciate this opportunity to discuss the economic outlook and economic policy.

Economic growth has continued at a moderate rate so far this year. Real gross domestic product (GDP) rose at an annual rate of about 2 percent in the first quarter after increasing at a 3 percent pace in the fourth quarter of 2011. Growth last quarter was supported by further gains in private domestic demand, which more than offset a drag from a decline in government spending.

Labor market conditions improved in the latter part of 2011 and earlier this year. The unemployment rate has fallen about 1 percentage point since last August; and payroll employment increased 225,000 per month, on average, during the first three months of this year, up from about 150,000 jobs added per month in 2011. In April and May, however, the reported pace of job gains slowed to an average of 75,000 per month, and the unemployment rate ticked up to 8.2 percent. This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter.1 But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession.2 If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.

Economic growth appears poised to continue at a moderate pace over coming quarters, supported in part by accommodative monetary policy. In particular, increases in household spending have been relatively well sustained. Income growth has remained quite modest, but the recent declines in energy prices should provide some offsetting lift to real purchasing power. While the most recent readings have been mixed, consumer sentiment is nonetheless up noticeably from its levels late last year. And, despite economic difficulties in Europe, the demand for U.S. exports has held up well. The U.S. business sector is profitable and has become more competitive in international markets.

However, some of the factors that have restrained the recovery persist. Notably, households and businesses still appear quite cautious about the economy. For example, according to surveys, households continue to rate their income prospects as relatively poor and do not expect economic conditions to improve significantly. Similarly, concerns about developments in Europe, U.S. fiscal policy, and the strength and sustainability of the recovery have left some firms hesitant to expand capacity.

The depressed housing market has also been an important drag on the recovery. Despite historically low mortgage rates and high levels of affordability, many prospective homebuyers cannot obtain mortgages, as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired. At the same time, a large stock of vacant houses continues to limit incentives for the construction of new homes, and a substantial backlog of foreclosures will likely add further to the supply of vacant homes. However, a few encouraging signs in housing have appeared recently, including some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of home prices in some areas.

Banking and financial conditions in the United States have improved significantly since the depths of the crisis. Notably, recent stress tests conducted by the Federal Reserve of the balance sheets of the 19 largest U.S. bank holding companies showed that those firms have added about $300 billion to their capital since 2009; the tests also showed that, even in an extremely adverse hypothetical economic scenario, most of those firms would remain able to provide credit to U.S. households and businesses. Lending terms and standards have generally become less restrictive in recent quarters, although some borrowers, such as small businesses and (as already noted) potential homebuyers with less-than-perfect credit, still report difficulties in obtaining loans.

Concerns about sovereign debt and the health of banks in a number of euro-area countries continue to create strains in global financial markets. The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions. European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area, and lay the foundations for long-term economic growth. U.S. banks have greatly improved their financial strength in recent years, as I noted earlier. Nevertheless, the situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.

Another factor likely to weigh on the U.S. recovery is the drag being exerted by fiscal policy. Reflecting ongoing budgetary pressures, real spending by state and local governments has continued to decline. Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain, as I will discuss shortly.

With regard to inflation, large increases in energy prices earlier this year caused the price index for personal consumption expenditures to rise at an annual rate of about 3 percent over the first three months of this year. However, oil prices and retail gasoline prices have since retraced those earlier increases. In any case, increases in the prices of oil or other commodities are unlikely to result in persistent increases in overall inflation so long as household and business expectations of future price changes remain stable. Longer-term inflation expectations have, indeed, been quite well anchored, according to surveys of households and economic forecasters and as derived from financial market information. For example, the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors have changed little, on net, since last fall and are lower than a year ago. Meanwhile, the substantial resource slack in U.S. labor and product markets should continue to restrain inflationary pressures. Given these conditions, inflation is expected to remain at or slightly below the 2 percent rate that the Federal Open Market Committee (FOMC) judges consistent with our statutory mandate to foster maximum employment and stable prices.

With unemployment still quite high and the outlook for inflation subdued, and in the presence of significant downside risks to the outlook posed by strains in global financial markets, the FOMC has continued to maintain a highly accommodative stance of monetary policy. The target range for the federal funds rate remains at 0 to 1/4 percent, and the Committee has indicated in its recent statements that it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. In addition, the Federal Reserve has been conducting a program, announced last September, to lengthen the average maturity of its securities holdings by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasury securities. The Committee also continues to reinvest principal received from its holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS and to roll over its maturing Treasury holdings at auction. These policies have supported the economic recovery by putting downward pressure on longer-term interest rates, including mortgage rates, and by making broader financial conditions more accommodative. The Committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

The economy's performance over the medium and longer term also will depend importantly on the course of fiscal policy. Fiscal policymakers confront daunting challenges. As they do so, they should keep three objectives in mind. First, to promote economic growth and stability, the federal budget must be put on a sustainable long-run path. The federal budget deficit, which averaged about 9 percent of GDP during the past three fiscal years, is likely to narrow in coming years as the economic recovery leads to higher tax revenues and lower income support payments. Nevertheless, the Congressional Budget Office (CBO) projects that, if current policies continue, the budget deficit would be close to 5 percent of GDP in 2017 when the economy is expected to be near full employment.3 Moreover, under current policies and reasonable economic assumptions, the CBO projects that the structural budget gap and the ratio of federal debt to GDP will trend upward thereafter, in large part reflecting rapidly escalating health expenditures and the aging of the population. This dynamic is clearly unsustainable. At best, rapidly rising levels of debt will lead to reduced rates of capital formation, slower economic growth, and increased foreign indebtedness. At worst, they will provoke a fiscal crisis that could have severe consequences for the economy. To avoid such outcomes, fiscal policy must be placed on a sustainable path that eventually results in a stable or declining ratio of federal debt to GDP.

Even as fiscal policymakers address the urgent issue of fiscal sustainability, a second objective should be to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law--the so-called fiscal cliff--would, if allowed to occur, pose a significant threat to the recovery. Moreover, uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence. Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives. Preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment, which should aid long-term fiscal sustainability. At the same time, a credible fiscal plan to put the federal budget on a longer-run sustainable path could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.

A third objective for fiscal policy is to promote a stronger economy in the medium and long term through the careful design of tax policies and spending programs. To the fullest extent possible, federal tax and spending policies should increase incentives to work and save, encourage investments in workforce skills, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. Although we cannot expect our economy to grow its way out of federal budget imbalances without significant adjustment in fiscal policies, a more productive economy will ease the tradeoffs faced by fiscal policymakers.

Thank you. I would be glad to take your questions.

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Bankers Gone Bad: MF Global, Bank of America

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Wall Street Bankster, Politician, and Con Artist: Former MF Global CEO John Corzine

Nomi Prins on Banker's Gone Bad - MF'ers, BoA, and Spanish Bond Bashing

Welcome to Capital Account. MF Global's creditors could have more than three billion dollars in claims against the failed firm. That's according to the creditors' bankruptcy trustee -- former FBI director Louis Freeh. Guess who is NOT in the front of the line for the money according to Freeh's report? Customers. This is after a report came out yesterday from the trustee for the creditors, James Giddens. Lot's to unpack, and we have just the guest to help us do it, author and former Goldman Sachs managing director Nomi Prins.

G7 finance chiefs reportedly held a Eurozone crisis conference call today as Spain's treasury minister has up a flare: Help Us! The country is shut out of the bond market. The treasury minister and reportedly some of Spain's bankers want the EU to help recapitalize struggling banks. This is easy for them to say. A bank rescue for them comes on the backs of taxpayers. It comes on the backs of citizens. We'll ask if anything could turn this dynamic around.

And, on a lighter night, no pun intended, it seems that cash strapped cities have discovered a new and creative way to fill the budget shortfall: putting advertisements on fire trucks. We are not kidding. Demetri and Lauren will explain on our episode of Loose Change.

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Government Lending Drives Consumer Credit Higher

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USA Consumer Credit Holders/Lenders (Not Seasonally Adjusted)



USA Private Sector Lending (Not Seasonally Adjusted)



USA Public Sector Lending (Not Seasonally Adjusted)

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USA Consumer Credit Increases to $2.5 Trillion

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USA Total Consumer Credit (Not Seasonally Adjusted)



USA Total Revolving Credit (Not Seasonally Adjusted)



USA Total NonRevolving Credit (Not Seasonally Adjusted)

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Fed Beige Book: USA economy expanded at a moderate pace

Summary The Federal Reserve Board on June 6, 2012 issued the Beige Book commentary on current economic conditions for the approximately six weeks ending May 25, 2012. In general, across the 12 Federal Reserve Districts, "overall economic activity expanded at a moderate pace". The prior 3 Beige Books were phrased similarly, but slightly more negative: "modest to moderate pace". All 12 district reports were positive, indicating economic growth for the 2nd consecutive report.

USA Financial System Slightly more positive: "Lenders in most Districts noted an improvement in loan demand and credit conditions". The prior report: "banking conditions remained stable, with modest improvements in demand for lending".

USA Jobs Nationwide Slightly more positive: "Hiring was steady or increased slightly". The prior report: "Hiring was steady or showed a modest increase across many Districts".

Economic Conditions and Activity Nationwide by Category
Manufacturing: "continued to expand in most Districts"
NonFinancial Services: "generally stable to slightly higher"
Consumer Spending: "unchanged or up modestly"
Automobile Sales: "New vehicle sales remained strong and inventories of some popular models were tight. Sales of used automobiles held steady"
Travel and Tourism: "expanded, boosted by both the business and leisure segments"
Residential Real Estate: "improved in most Districts"
NonResidential Real Estate: "Commercial real estate conditions improved in most Districts"
Agriculture: "conditions generally improved"
Natural Resources: "Energy production and exploration continued to expand, except for coal producers who noted a slight slowing in activity"
Wages: "Wage pressures overall were modest"
Prices: "Price inflation remained modest"
Transportation: nothing in general reported

Economic Conditions and Activity by Federal Reserve District
Boston: continues to expand
New York: continued to expand at a moderate pace
Philadelphia: continues to improve, but the pace has slowed slightly in most sectors
Cleveland: grown at a moderate pace
Richmond: improved modestly
Atlanta: continued to expand at a moderate pace
Chicago: continued to expand at a moderate pace
St. Louis: continued to grow at a modest pace
Minneapolis: grew at a modest to firm pace
Kansas City: improved moderately
Dallas: expanded at a moderate pace
San Francisco: continued to grow at a moderate pace

FDIC Problem Bank List Decreases to 9-Quarter Low

The FDIC problem bank list decreased by 41 to 772 at March 31, 2012 for the 4th consecutive quarterly decrease. The total continues very high, but has dropped below 800 after 7 consecutive quarters above. If the problem list has peaked and continues a downtrend, then bank failures will also continue decreasing accordingly over time. Bank failures and the related charts of total failures and cost to the FDIC Deposit Insurance Fund are posted weekly on this website.

There were 7,307 financial institutions reporting and the problem bank list of 772 represents 10.57% of the total, which is very high. This is down from 11.05% in the prior quarter 12-31-11 and down from 11.72% in the prior year quarter 3-31-11. In a healthy economy and banking system, less than 1% of financial institutions are on the problem bank list and this can be as low as 0.50% (1/2 percent).

FDIC Problem Banks by Quarter The FDIC problem bank list peaked at 888 at March 31, 2011. The total problem banks remain elevated but is decreasing. The problem bank list has decreased 4 consecutive quarters, after increasing 18 consecutive quarters (from Q4 2006 through Q1 2011). The total assets of the problem banks from the year-ends 2004 through 2011 (in billions) were $28, $7, $8, $22, $159, $403, $390, and $319, respectively. The total assets of the current (3/31/2012) 772 problem banks is $292 billion, or an average of $378 million in total assets per problem bank. The FDIC reports the total problem banks on a quarterly basis.




Only 16 Banks Fail in the First Quarter (FDIC Quarterly Banking Profile, May 24, 2012) The number of insured institutions reporting quarterly financial results declined to 7,307, from 7,357 at year-end 2011. Two institutions’ financial reports had not been received at the time this publication was prepared. Mergers absorbed 27 institutions during the quarter, while 16 insured institutions failed. This is the smallest number of bank failures in a quarter since fourth quarter 2008, when there were 12 failures. For the second quarter in a row, no new reporters were added. In the last five quarters, the only new charters that have been added have been charters created to absorb or liquidate failed banks. The number of insured institutions on the FDIC’s "Problem List" declined from 813 to 772 during the quarter, and assets of “problem” banks fell from $319 billion to $292 billion. The number of “problem” institutions has fallen in each of the last four quarters, and is now at its lowest level since year-end 2009.

U.S. Bank Small Business Survey: 71% Say USA in Recession

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US Bank Small Business Survey

U.S. Bank Releases Results of 2012 Small Business Annual Survey

Business improves though most small business owners still believe the economy is in recession

MINNEAPOLIS - (BUSINESS WIRE) - May. 30, 2012 - Small business owners' view of the economy may have improved in 2012, but 71 percent still believe the United States economy is in a recession according to results of the 2012 U.S. Bank Small Business Annual Survey. Closer to home, the survey found more small business owners consider the financial health of their company as "good" to "excellent." Sales volatility is less of a concern now than in years past, and the number one business issue on their minds in the 2012 election is healthcare reform.

Now in its third year, the U.S. Bank Small Business Annual Survey polled 3,220 small business owners with $10 million or less in annual revenues. Owners were surveyed between March and April 2012 in the 25 states where U.S. Bank provides small business banking services, primarily in the Midwest and Western United States. The questions centered on economic conditions, business conditions, business challenges, 2012 election issues, work/life balance and banking relationships.

"Small business owners are creating ways to succeed, despite lingering concerns about the economy," said Rick Hartnack, vice chairman of consumer and small business banking at U.S. Bank. "Business is rebounding, especially among businesses with at least $1 million in annual sales and five or more employees. For those businesses, prospects for growth are particularly strong, as are their plans to hire."

Business Conditions Improve, Economy Still a Concern

Overall, 69 percent of respondents said the financial health of their business was "good," "very good" or "excellent," up from 64 percent in 2011. This year, 29 percent said they saw revenue increase over last year, which is up slightly from 26 percent in 2011. Less than half expect to see revenue improve next year, however the numbers jump among businesses with at least $1 million in annual sales. For these larger businesses, 40 percent saw an increase in sales over 2011, 58 percent expect revenue to grow next year and 34 percent say they plan to hire in the next 12 months.

"Economic uncertainty" remains the number one concern cited among respondents, however "poor sales" - the second-biggest challenge for the past two years - is less of a concern in 2012 with only 12 percent citing sales as a challenge. Healthcare reform is a growing concern, with 60 percent saying they believe it will negatively impact their business, up from 57 percent in 2011 and 55 percent in 2010. States where small business owners are less concerned about healthcare reform than the national average include Washington, Oregon, California and Illinois.

Top Small Business Issues for the 2012 Election

The five top business issues on the minds of small business owners in the 2012 election are healthcare/Medicare, jobs and unemployment, taxes, the federal deficit/debt and Social Security. When asked which issues are more important this year versus the 2008 election, most said healthcare/Medicare, followed by the federal deficit/debt, jobs/unemployment, energy costs and taxes. When asked what they would do if they were the president of the United States for one day, small business owners said they would lower taxes, reduce regulations and tackle health insurance issues.

U.S. Bank Releases Results of 2012 Small Business Annual Survey

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