The U.S. bank industry has recovered to the point that it can boost the economic recovery by extending more loans, the top bank regulator said on Tuesday.
Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp, said he was encouraged by banks' increased lending but said they must do more to continue reaping the profits seen in recent quarters.
Bank loan balances rose $130.1 billion, or 1.8 percent, in the 2011 fourth quarter compared to third quarter, according to a quarterly report by the FDIC released on Tuesday.
Gruenberg said that with balance sheets now greatly strengthened from their weak state following the 2007-2009 financial crisis, the industry can lend more if demand increases.
"The industry is now in a much better position to support the economy through expanded lending," he said.
The FDIC report is the latest in a slew of data that has led economists to lay aside concerns that the U.S. economy would slow abruptly at the start of this year. The jobless rate hit a three-year low last month, manufacturing has picked up, and even the housing sector is stirring.
The FDIC noted that this is the third straight quarter that bank loan balances have risen and that the fourth quarter increase is the largest since 2007, if the impact of an accounting change on first quarter 2010 totals is not counted.
Credit to businesses, up $62.8 billion, or 4.9 percent, led the increase in lending totals.
While much of that went to large and medium-sized businesses, the FDIC said that for the first time in the seven quarters that the figures have been tracked, lending to small businesses, defined as loans of $1 million or less, went up. Such lending increased $2.8 billion, or 1 percent.
Consumer loans remain a weak spot, although credit card lending was up in the fourth quarter due to the holiday shopping season.
The housing market continues to face problems, and real estate construction and development loans dropped for the 15th straight quarter, according to the FDIC.
Jim Chessen, chief economist at the American Bankers Association, said banks expect business lending to continue to increase this year.
"I'm pretty optimistic about loan growth," he said. "We expect loan growth, particularly on the business side, to be 6 or 7 percent for 2012."
He noted that banks are not making as much on loans as in the past due to historically low interest rates.
PROFIT UP, BUT FOR HOW LONG
A boost in lending is not only key to improving the economy but also to banks' bottom lines.
The FDIC quarterly report showed the industry earned $26.3 billion in the fourth quarter, up $4.9 billion, or 23.1 percent, from a year earlier. However, the increase was largely due to banks setting aside less money to guard against loan losses.
The amount set aside for loan losses in the fourth quarter was $19.5 billion, down 40.1 percent from a year earlier.
Officials have warned that this trend cannot continue much longer. "Future earnings will have to be based to a greater extent on increased lending, consistent with sound underwriting," Gruenberg said.
Underscoring this message, the FDIC released data showing declining bank revenues. Fourth-quarter net operating revenues declined by $3.8 billion, or 2.3 percent, compared with a year ago.
Net operating revenues for all of 2011 were lower than in 2010. The FDIC said it was only the second year-over-year drop since 1938. The other time was in 2008.
Banks' fourth-quarter profits fell $9 billion when compared to the third quarter. FDIC officials attributed the decline to seasonal and timing issues and said it was not indicative of a trend. For instance, officials said banks tend to recognize more losses on their portfolios at the end of the year.
For all of 2011, bank profits were $119.5 billion, the highest level since 2006.
Several other key indicators show that banks' health continues to improve.
Troubled loans, those that are 90 or more days past due, fell for the seventh straight quarter. And the number of banks on the agency's "problem list" fell to 813 in the fourth quarter from 844 in the third quarter.
The pace of bank failures has been declining over the past two years.