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U.S. banks earn record $42.2B in 2nd quarter

Losses on loans fall to the lowest level since 2007, but increasing rates a concern

By Marcy Gordon
Associated Press

WASHINGTON U.S. banks earned more from April through June than during any quarter on record, aided by a steep drop in losses from bad loans.

The Federal Deposit Insurance Corp. says the banking industry earned $42.2 billion in the second quarter, up 23 percent from the second quarter of 2012. About 54 percent of U.S. banks reported improved earnings from a year earlier.

Banks’ losses on loans tumbled 30.7 percent from a year earlier to $14.2 billion, the lowest in six years. And bank lending increased 1 percent from the first quarter. Greater lending helps boost consumer and business spending, leading to more jobs and faster economic growth.

Still, the report shows that the largest banks continue to drive the industry’s profits while smaller institutions have struggled. Banks with assets exceeding $10 billion make up only 1.5 percent of U.S. banks. Yet they accounted for about 82 percent of the industry’s earnings in the April-June quarter.

Those banks include Charlotte-based Bank of America Corp., as well as Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most have recovered with help from federal bailout money and record-low borrowing rates.

Overall, FDIC Chairman Martin Gruenberg said the second-quarter results “show a continuation of the recovery in the banking industry.”

One concern is the recent spike in interest rates. Rates have risen since Chairman Ben Bernanke indicated this spring that the Federal Reserve could slow its bond purchases later this year, if the economy continues to show improvement. The bond purchases have kept long-term interest rates low.

Higher interest rates could have mixed impact on banks. On one hand, they make it more expensive for banks to borrow. But they also enable banks to charge more for loans.

“It’s a tricky balance to strike,” Gruenberg said at a news conference.

Losses on loans fell to the lowest level since the third quarter of 2007. Home equity loans showed the greatest declines in losses.

Another sign of the industry’s health is that fewer banks are at risk of failure. The number of banks on the FDIC’s “problem” list fell to 553 as of June 30, from 612 in the first quarter.

And so far this year, only 20 banks have failed. That follows 51 closures last year, 92 in 2011 and 157 in 2010. The 2010 closures were the most in one year since the height of the savings and loan crisis in 1992.

The FDIC is backed by the government, and its deposits are guaranteed up to $250,000 per account. Apart from its deposit insurance fund, the agency also has tens of billions in loss reserves.

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