Meet the Author

Kristle Romero Cortés |

Research Economist

Kristle Romero Cortés

Kristle Cortés is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. Her research interests include empirical corporate finance, entrepreneurial finance, and the structure, optimization, and regulatory practices of the financial services industry.

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Meet the Author

Sara Millington |

Research Analyst

Sara Millington

Sara Millington is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. Her primary interests include macroeconomics, monetary policy, and public finance.

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Economic Trends

Banks Planning for a Stronger Economy

Kristle Romero Cortés and Sara Millington

A number of indicators suggest that the banking industry continues to see improvement in overall economic stability. Two of the more significant indicators are loan-loss provisions and net charge-offs. Loan-loss provisions are funds set aside to cover potential loan defaults. Net charge-offs are loans that are deemed to be unrecoverable after being written off. Banks have recently been decreasing their loan-loss provisions, while net-charge offs have steadily declined since the crisis.

Provisions for loan and lease losses at Federal Deposit Insurance Corporation (FDIC) institutions reached a record low in the first quarter of 2013, falling 23 percent to 11 billion from the first quarter of 2012. Provisions for loan and lease losses have now returned to pre-crisis levels.

The decline in provisions matches the steady decline of net-charge offs (NCOs) experienced at FDIC institutions. Year-over-year changes in NCOs have moved closely with year-over-year changes in loss provisions since the fourth quarter of 2011. Net charge-offs have decreased 27 percent since the first quarter of 2012 although they are not yet at pre-crisis levels.

Net charge-offs for FDIC institutions in the first quarter of 2013 are at 16 billion, falling from 18.5 billion in the previous quarter. This decrease maintains the declining year–over-year trend in net charge-offs that began in the first quarter of 2010.

Of all the types of securitized loans and leases that are recovered, credit card charges form the greatest portion, followed by home equity loans. The year-to-date annualized NCOs of securitized assets are also down across all asset types.

Another positive trend for FDIC institutions is the persistent increase in deposits. Domestic deposits increased 4.3 percent, and total deposits increased 3 percent. Balances in accounts of more than $250,000 are the driving force behind the increase observed in domestic deposits. Deposits are important to banks because they provide a low-cost supply of money that can be lent out at higher rates. Also, deposits tend to be quite “sticky,” so they provide a stable source of funds.

FDIC institutions lent consistently throughout 2012. In the first quarter of 2013 there was a seasonal decline in lending due to the drop in credit card balances. Lending fell by 2 percent, and credit card balances outstanding fell by 5.2 percent. The last two years have also seen a drop in lending in the first quarter of the year and positive lending behavior during the remainder of it. As deposits continue to grow, there will be more funds available for loans and leases.

The lower loan-loss provisions are another sign that the economy is showing signs of recovery. Lower provisions have a downside risk, however. They leave banks exposed to future bumps in the recovery process. Larger institutions lead the trend to reduce reserves, and perhaps this is another sign of growth.