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U.S. Banks Lose Money for First Time Since Depression

September 16, 1987

WASHINGTON (AP) _ The U.S. banking industry is losing money for the first time since the Depression, prompting analysts to predict layoffs and other cost-cutting measures at major banks.

The nation’s 13,937 federally insured commercial banks reported a second quarter loss of $10.6 billion, the first red ink for the industry as a whole in more than 50 years, the Federal Deposit Insurance Corp. said Tuesday.

″It was clearly the worst quarter in the history of the industry since the FDIC began operating in 1934,″ FDIC Chairman L. William Seidman said.

The losses came as banks transferred an unprecedented $21.2 billion to reserves for bad loans, particularly those owed by Third World nations such as Brazil, which has stopped paying on its $23.6 billion debt.

Seidman said he believed the reserves were the banks’ best estimate of future loss, but some analysts said the reserves should be even higher and predicted banks would be forced to follow the cost-cutting lead of Chemical New York Corp., the nation’s fifth-largest bank company.

Beset with shaky loans to Latin American countries, Chemical Bank announced this week that it is reducing its work force by 10 percent, or by about 2,100 jobs.

″I think we’re going to see a lot more of this kind of restructuring,″ said Paul Getman, senior financial analyst with Wharton Econometrics, a Philadelphia forecasting firm.

Companies likely to follow Chemical’s lead ″are not what you would call sick banks,″ Getman said. ″These are banks that have to slim down by necessity ... because they have just become bloated over the years.″

Bert Ely, a financial industry analyst based in Alexandria, Va., said figures in the FDIC’s quarterly banking profile indictate that, in at least the second quarter, banks did not have expenses under control.

Noninterest expenses, which include payrolls, rose at an 11 percent annual rate to $23.8 billion in the second quarter.

″This is one of the real problem areas that banks have right now. Chemical Bank ... took the first of what I think will be a number of steps by banks of all sizes to really start hitting on their non-interest expenses,″ he said.

The second quarter loss for the industry more than wiped out a record first quarter net income of $5.3 billion, posted after banks added $4.1 billion to loan loss reserves. The net loss for the first six months was $5.3 billion.

Seidman said he expected bank performance would turn around in the second half of the year. He predicted net income for the full year would be between $4.5 billion and $6 billion.

A horrible second quarter had been expected. Major banks, including Citicorp, Chase Manhattan Corp., Security Pacific Corp. and BankAmerica Corp., had announced in May that they were adding to reserves to cover Third World loans.

But Seidman said the loss was a little higher than he had anticipated. He said he believed bank executives said ″Let’s get it all behind us″ and set aside reserves for a broad range of loans in addition to foreign loans.

According to the FDIC’s quarterly banking profile, 2,354, or 17 percent, of commercial banks lost money in the three months ending June 30. That compares with 2,019, or 14 percent, in the first quarter.

Although 83 percent of the banks showed a second quarter profit, the industry as a whole was dragged down by the 10 largest banks, which all lost money and account for nearly a quarter of all the banks’ assets.

Banks continue to fail at a post-Depression record rate. As of Monday, 126 banks had failed this year compared with 144 in all of 1986. Seidman is predicting 200 failures by the end of the year and 150 in 1988.

Banks in the Southwest, hit hard by faltering energy prices, accounted for 40.4 percent of money-losing institutions, and banks west of the Mississippi River accounted for 77 percent.

Seidman said the health of Midwestern banks has been improving as the price of agricultural land stabilizes or rises slightly.

The American Bankers Association said the bank health report bolstered its contention that banks ought to be permitted to underwrite securities and offer a broader range of financial services.

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