[quote=jimfickett]Well, here is a little bit of additional data. I went and got FDIC data on noncurrent loans, chargeoffs, provisions, and loan reserves, for the last few years, and made a graph to see the trends. I realize that the proper level of reserves is a complex question, depending not only on levels but rates of loans going bad (in various senses). But it is still interesting to see that noncurrent loan growth was still strong in Q4 (last data available), while reserves had not kept pace at all and were leveling off.
That’s a good graph. What happens, briefly, is as follows: Asset values start falling. Charge-offs start climbing and banks start reserving heavily, generally trying to keep reserves at 100% of NPAs. Then asset values start to level off. NPAs keep coming in, but because the banks feel that they have a better handle on what the ultimate loss exposure is (due to values stabilizing), reserve building starts to lag the growth in NPAs.
Importantly, to reiterate, a big chunk of an NPA has already been reserved for by the time it’s liquidated and the final charge-off is tallied up. That’s one reason why banks are getting away with “only” reserving at about 50% of NPAs right now (although, it looks like a little bit of cheating to me… after all, they still have to have appropriate GENERAL – as opposed to specific – reserves when their credit metrics eventually stabilize, whenever that is).
Now… the reality is they *should* still be at 100%… in my opinion, that is. Which is why I think there’s a LOT of risk in the Big Banks right now. I think they’re generally undercapitalized and under-reserved. The next 2-3 years is going to be very ugly for charge-offs. But they are in considerably better shape than one year ago.
