Megabanks Draw Down Reserves to Boost Profits

Sunday, 05 May 2013 03:26 PM

By Michael Kling

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Mega-banks said they made a bundle this earnings season. Actually, they only moved money out of reserve, or rainy-day, funds in order to boost earnings and create the appearance of increasing profits.

The top five firms reported $19.5 billion in profits. They also removed $5 billion from their reserve funds in the first quarter, according to an analysis by The Washington Post. In the fourth quarter of last year, they took out $3.7 billion from their rainy-day funds.

The five largest banks - JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and U.S. Bancorp - released a total of $22.5 billion last year, and $27.5 billion in 2001, the Post reports. In contrast, they added $8.7 billion to reserves in 2010.

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Banks defend the practice. Housing is recovering and few consumers are defaulting on loans. If banks have few bad loans, it's fine to have less money as a cushion.

For instance, Wells Fargo said it has the fewest bad loans since 2006. "These portfolios should continue to benefit from our underwriting and the continued improvement in the housing market," stated Wells Fargo Chief Financial Officer Timothy Sloan in a conference call, according to the Post. "Absent a significant deterioration in the economy, we continue to expect future reserve releases in 2013."

Still, the pace of the drawdowns has attracted regulators' attention. Comptroller of the Currency Thomas Curry has warned banks about drawing down reserves too quickly while the economic recovery remains weak, according to the Post. Banks might not be able to handle another wave of bad loans made before the financial meltdown.

OCC officials say they're keeping a close eye on reserve draw downs. Banking analysts say banks are constrained by accounting regulations.

"People keep saying these are not high-quality earnings - and they're not, but this is not up to the banks," Nancy Bush, a SNL Financial contributing analyst, told the Post.

Accounting rules set by the Financial Accounting Standards Board limit banks from building large reserves when they're have few losses during good times, the Post reports. When the recession hit, banks struggled to cover loan defaults and shore up reserve funds.

The accounting board is considering proposals to require banks to hold more
reserves. Improving bank earnings may not be sustainable, warned Fitch Ratings.

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