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Peter Crabb: As big banks roll in profits, depositors are left behind

Large banks have much to be thankful for this week. For depositors, the holiday season is looking bleak.

The Federal Deposit Insurance Corp. released its Quarterly Banking Profile this week. For the three months ending Sept. 30, U.S. banks earned $14.5 billion in profits, compared with only $2 billion for the same period last year. About two-thirds of the nation’s 7,760 banks reported higher net income.

Return on assets, a key measure of bank profitability, is at 0.56 percent year-to-date – a strong improvement from the 0.03 percent earned in 2008. Banks’ net interest margin, or the earnings from loans less interest paid on deposits, is now over 3.5 percent – a level not seen since 2005.

An improving banking sector often leads improvements in the overall economy. A healthy banking system increases business lending and hiring. If the U.S. is to breakout of the deepest recessionary period since the early 1980s, the banking sector must be able to clear up the problem loans of the past.

Unfortunately, the number of banks at risk of closure from bad loans continues to climb. The FDIC's problem institution list grew from 829 to 860 at the end of September.

These problem banks are concentrated, however, among smaller institutions, regional and community banks. Big, money-center banks are doing well.

Since January, 99 of the 127 banks that were taken over by the FDIC have been small. Twenty-seven of the failed institutions were very small, with less than $100 million in assets. Of the 124 banks that were bought out this year, 107 were small.

No Idaho banks closed this year. Ketchum-based First Bank of Idaho did close in 2009, and all deposits were immediately transferred to the local offices of U.S. Bank.

The profitability of smaller banks is also weaker than average. Large banks with more than $10 billion in assets are currently earning 0.62 percent on these assets, while all other banks are returning less than 0.4 percent.

Idaho bank profitability is particularly weak. Eleven of the 18 FDIC covered institutions based in Idaho reported a loss for the quarter ending Sept. 30. More than 5 percent of loans at Idaho banks are considered bad (non-performing), compared with less than 2 percent during the same three-month period in 2008.

Weakness in regional or community banks spells opportunity for large banks. The banking system in the U.S. is likely to become more concentrated, meaning fewer and fewer large institutions dominate the market.

In concentrated industries a few large firms set prices and earn most of the profits. According to the FDIC more than 75 percent of all deposits are held at just over 100 banks, or less than 2 percent of the total. These same few banks hold nearly 79 percent of all loans.

Depositors are likely to get squeezed. While loan rates may remain competitive, larger banks generally pay less interest on deposits. Meanwhile, smaller banks can’t attract deposits by raising rates because earnings on loans are so low.

You can be thankful your money is safe at the bank; the FDIC has you covered up to $250,000. But you will have to look elsewhere to earn something on your money.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.

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