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NEW YORK: Banks that received bailout funds said they are trying to comply with executive pay curbs imposed by the Treasury Department, but the firms are worried about changing rules and an inability to keep top talent, according to a report relesed Wednesday by a TARP overseer.Neil Barofsky, special inspector general for the Treasury Department’s 700 billion bailout, conducted the survey of 364 banks in mid-February. The banks responded to questions about how they are adopting various compensation restrictions.Barofsky conceded that the survey was mailed out during a particularly confusing time in the executive compensation saga, as the Recovery Act tightened some of the compensation limits initially set up by the Troubled Asset Relief Program. Still, the report underscores the continuing tension between banks’ concerns about the pay restrictions and the uproar over bonuses by the public and lawmakers.When TARP was enacted in October 2008, the bill included several executive compensation curbs. Among them were limits on excessive risk taking and tax deductions for pay over 500,000 for the five highest paid employees, prohibitions on golden parachutes and a requirement that bonuses be paid back in the event of fraud. February’s stimulus bill required Treasury to strengthen many of those provisions, and Treasury implemented its new rules in June. The Obama administration also gave its pay czar Kenneth Feinberg the power to look back at certain payments made as early as February to determine if they were consistent with the new rules set out by the stimulus bill.According to Barofsky’s report, ever-changing rules have made compliance difficult for some banks, which expressed frustration that Treasury was altering the rules after the banks had signed agreements for TARP funds.Banks also argued that the rules were unprecedented, and many worried that more changes would be enacted in the future, perhaps on a more permanent basis.A number of firms said they have found it difficult to attract or hold on to top-tier talent as a result of the restrictions. One bank said said it lost “five top executives to other firms as a direct result of compensation restrictions,” according to the report. Some said they were looking to give back their TARP funds due to the competitive disadvantage that the compensation limits put on the company.Still, many banks said they were taking actions to adapt, including assigning special counsel to help them comply with the new rules.Barofsky’s report made no recommendations, but noted that banks saw a need for more guidance from Treasury to help them implement the new restrictions.In a response letter, Treasury’s TARP point man Herb Allison underscored the fact that the timing of the survey “no doubt heavily influenced the views of the survey respondents.” Allison added that Treasury has since consolidated all previous executive compensation rules, “providing greater certainty and clarity for TARP recipients.”Supporters of pay curbs have argued that big bonuses caused some banks to make dangerously risky business decisions rather than focus on the long-term health of their firms. Such bets were believed to contribute to the downfall of Bear Stearns and Lehman Brothers, which brought on the credit crisis in September 2008.Soaring compensation packages and bonuses have also become easy targets for lawmakers and taxpayers.Earlier this year, public furor erupted over the 165 million in retention bonuses that AIG (AIG, Fortune 500) paid to employees of its most troubled division, after the government stepped in with the largest taxpayer-supported bailout any company has received.The Obama administration has proposed broad compensation reform for all financial institutions — not just those receiving federal support. Those proposals include stricter compensation guidelines, so-called say on pay requirements and the regulation of independent compensation committees at firms.

Source:CNN

NEW YORK (Fortune) — Shares of BB&T Corp. shot higher Friday after reports that it might be scooping up the remains of Colonial BancGroup. It’s no wonder: Such purchases give healthier banks a chance to grow on the cheap. That’s valuable at a time when many institutions have been shrinking in response to the recession.More than 70 banks have failed this year. Scores of additional failures are expected in coming years, as the industry works through trillions of dollars worth of residential and commercial real estate problems. While most of the biggest recent bank failures have been resolved via sales to major institutions or investor groups, regional banks have been bulking up as well. Since the banking crisis started last year, six regional banks have bought at least two failed banks from the FDIC. The leader has been Zions Bancorp (ZION), a Salt Lake City-based institution that has acquired four banks from the FDIC. Other buyers of multiple troubled banks include U.S. Bancorp (USB, Fortune 500), the Minneapolis-based bank that last year bought the remains of troubled thrifts Downey Savings and PFF, which failed on the same day. The joint purchase of Downey and PFF wound up being the third largest deal by assets for failed banks last year, after the WaMu and IndyMac sales. FDIC rules require the agency to resolve bank failures in the manner that’s least costly to the deposit insurance fund. The deposit fund is backed by fees paid by banks, but the FDIC has a credit line with the Treasury Department that it could tap in an emergency. The rash of failures over the past year and a half has come at heavy cost to the fund, which is now 75% below its statutory minimum balance. The cost to the FDIC fund in the U.S. Bancorp and Zions deals alone was 3.6 billion. The agency also agreed to so-called loss-sharing agreements on some of the transactions, which means the fund could end up shouldering additional costs on troubled assets taken on by the acquirers. It’s this provision — capping the acquirer’s losses at the expense of the fund — that is most alluring to regional banks and their investors. In addition to BB&T (BBT, Fortune 500), analysts have pointed to Cincinnati’s Fifth Third (FITB, Fortune 500) and Atlanta’s SunTrust (STI, Fortune 500) as regional banks that might be chosen to participate in future deals. Some bankers have downplayed questions about buying failed institutions. Such deals “really are off our radar,” Fifth Third chief executive officer Kevin Kabat told investors last month, noting that there have been relatively few bank failures in the Midwest.But given the advantageous terms, no one is ruling FDIC-assisted deals out, either. U.S. Bancorp chief executive officer Richard Davis said in a conference call with analysts and investors last months that the bank “will always be available” for any “opportunities that come along” on the FDIC failed bank list, though it is keeping an eye out for bigger ones.

NEW YORK: More than 1,000 emergency loans have been granted to struggling companies since the Small Business Administration launched the much-anticipated America’s Recovery Capital program in mid-June, according to a lending tally released this week. While the list confirms that the program is likely to hit its goal of making 10,000 loans by the time it ends in late 2010, it also reveals that banks are still cautious about participating.Around 400 lenders are currently making loans through the America’s Recovery Capital (ARC) program, out of 8,200 FDIC-backed banks in the U.S. That relatively small number would carry more weight if it included top-tier SBA lenders with national reach. But only three of the SBA’s 10 most active lenders this year — Wells Fargo, PNC Financial and Zions Bank — have issued ARC loans.The SBA’s data also revealed a striking geographic disparity. Two Midwestern states, Minnesota and Wisconsin, each have scores of participating lenders and have together generated 28% of the ARC loans made to date. By comparison, 14 states, including Alabama, Oregon and South Carolina, each have fewer than five lenders participating in the program.Lenders have been hesitant since the ARC loan concept first surfaced as part of February’s stimulus bill. The program makes interest-free loans of up to 35,000 available to business owners to temporarily relieve them of payments due on other debts. The SBA is fully insuring the loans, meaning that if the business defaults, the government eats the debt. The agency is also covering the interest on the loans, paying banks two percentage points over the prime rate.Although the loans are 100% guaranteed for banks, they’re still risky. The SBA is forecasting a 56% default rate. Small, low-interest loans like these aren’t particularly profitable for banks, considering the time required to vet applications and manage the loans, and if a loan turns bad, pursuing reimbursement from the SBA consumes more administrative resources. Lenders are also concerned that their repayments will be turned down on technicalities if they’ve left anything amiss in the paperwork.”We are still working to determine whether we will participate in the program,” said Bank of America (BAC, Fortune 500) spokeswoman Anne Pace. “It will require some changes to our infrastructure, which takes time and are costly, so we need to evaluate whether it makes sense for us or if there’s something else we can offer customers that would be more worthwhile. We think that by the end of the month we will have an answer.”While Bank of America is not a top-10 SBA lender this year, it has a much wider reach than the regional and community banks that dominate the ARC loan list. But even smaller banks have been slow to make these loans.In Connecticut, for example, there are only three participating lenders, each of which has made one loan since the program’s inception. Bob Polito, senior vice president of one of those lenders — Webster Bank, in Waterbury, Conn. — was one of the few bankers who had been eagerly awaiting the program. His biggest worry back in June was that Webster Bank wouldn’t be able to accommodate the rush of demand.”We’ve screened hundreds of applications from customers and non-customers alike,” he said. “All need the help, but few qualify.”Wells Fargo (WFC, Fortune 500) has had a similar experience. The bank has received 17,000 calls about ARC loans and has approved 31 of them, according to Tom Burke, the bank’s senior vice president of SBA lending. Three have received SBA approval, and one loan has closed. The rest are pending. The SBA’s guidelines for the program are restrictive. Borrowers must have been in business for at least two years and be cash-flow-positive in one of the last two years. They also need to demonstrate financial hardship, such as a revenue drop of 20% or more. Finding businesses that are healthy enough to qualify for ARC loans but damaged enough to need them has proved challenging.Zions Bancorp (ZION) of Salt Lake City, one of the SBA’s most active lenders, has approved loans in Idaho, Oregon and Utah. Lori Chillingworth, senior vice president of business banking at Zions, said that about half the calls she gets regarding the ARC loans are from business owners who are not eligible.”One of the qualifications teeters in a gray zone, because they have to be suffering from financial difficulty but also have to be viable,” she said. “It’s is a fine line to walk to get that correct small business owner. But when we can identify them, it’s a huge burden that is off their shoulders.”Chillingworth said her bank is committed to ARC loans despite the program’s hassles.”It’s a lot of paperwork for the bank and borrower and, because of the volume, it has slowed our processing time for all the loans in our pipeline,” she said. “But we never went in thinking that this would be a money-maker. We went in thinking that it will benefit the bank because it generates customer loyalty. Plus, isn’t the bank better off if it can help that customer and not have to deal with delinquencies or liquidating the client?”Tom Burke of Wells Fargo said that his bank spends as much time on paperwork for a 35,000 ARC loan as it would for a 1 million traditional SBA loan. “The paperwork and the process are extremely tedious,” he said. “This makes the program burdensome for the applicant and the lender.”Wells Fargo is one of the rare banks willing to take ARC applications from businesses that don’t have an account at one of its branches. Webster Bank has taken the more common route of restricting the loans to existing customers looking to pay down debts the bank already holds. “It’s unseemly to us that a non-Webster Bank customer wants an ARC loan to pay an obligation to another bank,” Polito said. “When we explain it, the prospect completely understands.”Some of those prospects have turned into new customers for Webster, even though the bank won’t extend them an ARC loan. “What we have offered these applicants is a chance to refinance the other bank debt at Webster Bank,” he says. “Some have taken us up on it as they come to realize that their bank won’t help them, while we are willing to discuss alternatives.”Zions trained all of its lending officers on the ARC program before its implementation, familiarizing them with the SBA guidelines and asking them to reach out to small business owners in their portfolios who might qualify. That meant tapping customers who might not qualify for other types of loans. But Chillingworth was eager to take on the additional risk.”Other lenders may worry that there won’t be a 100% guarantee if they didn’t document the loan correctly, and that’s a huge problem, but I don’t think that’s a problem with the ARC loan program — that goes much deeper with the SBA,” she said. “I know there may be a larger default rate, but I believe that with the support of the SBA, the reward is still worth it. One of our customers started crying and said, ‘This is just what I needed,’ so, really, it is rewarding for us.”

NEW YORK: U.S. banks will collect a record 38.5 billion in overdraft fees this year, with nearly all the revenue paid by just 10% of customers, according to a research report released Monday.The windfall is nearly double the 19.9 billion collected in 2000, as overdraft fees drift higher despite the recession, said Mike Moebs, chief executive of research company Moebs Services.”Overdrafts are the mother lode of all service-related charges, and they’re often the only source of capital,” Moebs said. “Still, we had never seen fees go higher in any recession until now.”The national median overdraft fee rose to 26 from 25 in 2008, while larger Wall Street banks charge a median of 35, Moebs said.Moebs Services collected data from 2,000 banks and credit unions, and the firm found that 44.5% reported a net overdraft revenue higher than their net income. Fee hikes have helped banks boost profit amid the recession, Moebs said.”Most people paying these fees have a credit score below 590 or so,” Moebs said. “Beyond that, they’re a whole gamut of people: rich and poor, men and women.” Government-mandated overdraft fee increases “are leading the charge,” Moebs said. For example, he said, a local U.S. post office decides to increase its overdraft fee to 35. Area retailers note the increase and in turn raise their own fees. Finally, banks follow suit.”I doubt anybody in Congress is aware of this,” Moebs said. “The customers are angry, and they have a right to be angry.”The Federal Reserve and other lawmakers are discussing rules about overdraft fees, Moebs noted, but he thinks cash-strapped customers need more transparency — and soon.”We need to do everything we can for consumers: send e-mails, text messages, voice-activated alerts,” Moebs said. “It’s essential that we send a wake-up call, especially to Wall Street banks.”A JPMorgan Chase (JPM, Fortune 500) spokesman told CNN that his company did not raise overdraft fees from last year, saying that the bank charges overdraft fees depending on number of times it occurs ranging from 25 to 35. Other banks were not reached for comment by CNN.–CNN’s Ekin Middleton contributed to this report.

Source:CNN

NEW YORK: For some banks, the grim reality is that another dose of TARP may be their best shot at salvation.Overwhelmed by loan losses, some hard-hit lenders are hitting up the Treasury Department for even more money from the Troubled Asset Relief Program. Last week, Midwest Banc Holdings (MBHI), a community bank based just outside of Chicago, outlined an extensive capital raising initiative after suffering its second consecutive quarterly loss. The bank said it had applied for as much as 138 billion under Treasury’s Capital Assistance Program, or CAP, an extension of the original TARP. The bank received 84.7 million in TARP funds last December.Citizens Republic Bancorp (CRBC), a Flint, Mich.-based bank that has suffered along with the local automotive industry, revealed in late June that it too was considering tapping up to 290 million from CAP, part of which would be used to redeem a portion of the Treasury’s original 300 million investment made last December. Experts say it seems certain that more small banks will follow the lead of Midwest and Citizens Republic.”I think we have only started to hear about the applications for CAP,” said Eileen Rooney, an analyst with Keefe, Bruyette & Woods.Feeling the pressureA combination of factors are driving banks to seek even more government assistance. Banks are facing intense pressure from regulators to raise new capital, particularly in the form of stock, which boosts a firm’s closely-watched tangible common equity levels, a key gauge of their capital health.Complicating matters further is the fact that many community and regional lenders are having a difficult time attracting fresh funds from the private markets. Investor demand for new stock and debt from smaller banks has tapered off significantly over the past two years.0:00
/2:18TARP ‘profits’ may be overstatedAs a group, banks and thrifts have raised just 306 million in subordinated debt so far this year, according to research firm SNL Financial. That’s a fraction of the 12.7 billion during the same period in 2007.”You have got a lot of banks and boards of banks who are really between a rock and a hard place,” said Lawrence Kaplan, a former attorney for the Office of Thrift Supervision who now focuses on bank regulatory issues for the law firm Paul Hastings.Widespread credit problems aren’t helping small banks either, particularly the rapidly deteriorating commercial real estate market. Roughly one third of all loans held by regional banks, on average, are tied to commercial real estate in some way, according to Moody’s.Making the cutSo far, Treasury has invested 204 billion in more than 500 different financial institutions through TARP as of the end of July. Treasury has not revealed how many lenders have submitted applications for funds under CAP. Banks have until November 9 to apply to the program.This time around however, experts anticipate the government will be a little more selective about who they approve for more funding.With the U.S. financial system and broader economy no longer on the brink of collapse, regulators arguably have a better sense of how the different corners of the nation’s banking industry are faring than they did during the panic-stricken days of last fall.In addition, lawmakers and the Obama administration alike have become increasingly wary about committing ongoing aid to troubled financial institutions at the expense of American taxpayers.Last month, the White House rebuffed requests for aid from CIT (CIT, Fortune 500), prompting the commercial lending giant to seek help from its bondholders.But if Treasury specifically uses CAP to target wobbly community and regional lenders, the government may be able to provide aid without fear of a public backlash, said Douglas Elliott, a fellow at the Brookings Institution.Unlike large Wall Street firms such as Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) that continue to play the role of public pariah, small banks boast a much friendlier relationship with local borrowers. At the same time, they avoided the hot-button issue of big bonuses that has incensed taxpayers.”The political landscape is a lot more favorable for [community banks],” Elliott said.Talkback: Should the government concentrate more on helping smaller, community banks instead of giants like Citigroup and Bank of America? Share your comments below.

Source:CNN

NEW YORK: Regulators shut down four regional banks Friday, the Federal Deposit Insurance Corporation said, bringing the total number of banks to fail in the United States to 68 this year.Friday’s bank closures will cost the FDIC fund 215.7 million, bringing the total cost for failed banks to 14.43 billion this year. That compares with 17.6 billion in all of 2008. First State Bank of Altus, based in Altus, Okla., was shut down and Herring Bank, headquartered in Amarillo, Texas, will take over all of the deposits of the failed bank. As of June 19, the First State Bank of Altus had total assets of 103.4 million and deposits of 98.2 million. The failed bank was the first to go down in the state of Oklahoma in 2009.0:00
/27:34Crisis in CapitalismMeanwhile, Integrity Bank, headquartered in Jupiter, Fla., was shuttered and Stonegate Bank, based out of Fort Lauderdale, Fla., will assume all of the deposits of Integrity Bank. As of June 5, Integrity Bank had total assets of 119 million and total deposits of 102 million. The failed Florida bank was the fourth to fail in the state so far this year. The third bank to go down Friday was the Peoples Community Bank, based in West Chester, Ohio. The First Financial Bank, National Association, headquartered in Hamilton, Ohio, will take over all of the deposits of the failed bank. The failed bank was the first bank to be closed in Ohio in 2009, and as of March 31, had total assets of 705.8 million and total deposits of 598.2 million.The fourth bank to fall Friday night was the First BankAmericano, based in Elizabeth, N.J., and the Crown Bank, of Brick, N.J. will take over the deposits. As of July 16, First BankAmericano had total assets of 166 million and total deposits of 157 million. The failed N.J. bank was the second bank in the state to fall in 2009.The number of bank failures so far in 2009 has more almost tripled last year’s total of 25.Smaller regional banks have been hammered in the downturn. Many of the banks failed because local residents and commercial real estate developers that took out loans have been unable to pay them back.

Source:CNN

NEW YORK: Even as top banks delivered abysmal performances last year, they still managed to pay out billions of dollars employee bonuses, according to a study published Thursday by New York Attorney General Andrew Cuomo.In an analysis of compensation practices of the original nine banks that received money under the Troubled Asset Relief Program, or TARP, most financial firms paid out compensation that was nowhere close to their overall yearly performance.Citigroup (C, Fortune 500), for example, which suffered more than 27 billion worth of losses in 2008, paid an estimated 5.33 billion worth of bonuses last year, according to Cuomo’s report. Citigroup has been one of the biggest recipients of government aid, taking in 45 billion in TARP funds. Taxpayers now own a third of the bank.Several banks that were profitable last year paid out bonuses that were substantially higher than what they earned. Goldman Sachs (GS, Fortune 500), which has come under significant scrutiny recently over this year’s bonus pool, paid out some 4.8 billion in bonuses despite earning just 2.3 billion. The company collected 10 billion under the TARP program but has since paid it back.JPMorgan Chase (JPM, Fortune 500) and Morgan Stanley (MS, Fortune 500) also issued bonuses last year that exceeded their annual profits in 2008.”When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well,” said Cuomo. “And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.”Profits earned by those banks, of course, are calculated after the companies paid out bonuses, salaries and various other expenses. Financial firms have long maintained that the complex nature of their business warrants competitive compensation packages to attract and retain top talent.Thursday’s report, which followed nine months of investigation into the compensation practices in the U.S. banking industry, heaped blame for the phenomenon on a variety of causes. One contributing factor, it noted, was the common practice among financial firms of “poaching” one another’s employees, as well as a culture at banks that workers would continue to receive sizeable bonuses no matter the firm’s performance.In light of that, management had, in some instances, no choice but to continue rewarding employees, even if their divisions lost money, the report suggested.0:00
/9:00Protecting consumers from banksOne such example of this was Merrill Lynch. In testimony before Cuomo’s office, John Finnegan, the former head of the firm’s compensation committee acknowledged that Merrill broke from its typical practice of setting bonuses based on overall revenue in 2007 after it suffered significant losses one division of the company. The risk, Finnegan hinted, was lower morale, not to mention jeopardizing the firm’s long-term health.”What these statistics portray is an ad hoc system that does not come close to meeting the goal of having employees share in the upside and the downside of their firm’s performance,” the report said. Since last fall, however, many large banks and Wall Street firms have attempted to do a better job of tying pay to performance. Both Goldman Sachs and Morgan Stanley declared plans earlier this year to reward a larger portion of annual bonuses in the form of stock instead of cash, since changes in the stock price would more closely mirror the firms’ overall performance.The use of so-called “clawback” provisions, which would reclaim pay from workers whose actions may damage the firm’s long-term financial health, is another proposal that has gained momentum recently.What seems certain however, is that the topic of bonuses, and corporate pay packages for the financial services industry, is unlikely to fade from the spotlight anytime soon.On Thursday, Rep. Edolphus Towns, D-N.Y., announced that the House Committee on Oversight and Government Reform Chairman will hold a hearing in September to review how executive pay restrictions are being implemented by bailout recipients.And earlier this week, the House Financial Services Committee voted in favor of legislation that would require that all publicly traded companies give shareholders a “say” on executive pay packages. Talkback: Should the government crack down even more on Wall Street bonuses? Share your comments below.

NEW YORK (Fortune) — Cleaning up after bank failures is one chore you won’t hear bankers complaining about. Since the start of 2008, 89 banks have failed, including giants Washington Mutual, IndyMac and BankUnited. Scores of additional failures are expected in coming years, as the industry works through trillions of dollars worth of residential and commercial real estate problems. While the failures are taking a toll on the Federal Deposit Insurance Corp.’s deposit insurance fund — the FDIC this year raised fees on banks in a bid to rebuild the fund’s depleted balances — they can also give healthier banks a chance to grow on the cheap. That’s valuable at a time when many institutions have been shrinking in response to the recession.”We continue to believe a select group of regional banks with sufficient capital, credit quality and management talent stand to benefit by rolling up failed institutions, thereby expanding their banking franchise,” analysts at Keefe Bruyette & Woods wrote in a note to clients this week. Indeed, while most of the biggest recent bank failures have been resolved via sales to major institutions or investor groups — JPMorgan Chase (JPM, Fortune 500) purchased WaMu, and private equity interests took over IndyMac and BankUnited — regional banks have been bulking up as well. 0:00
/4:40Bair: Trust the FDICSince the banking crisis started last year, six regional banks have bought at least two failed banks from the FDIC. The leader has been Zions Bancorp (ZION), a Salt Lake City-based institution that has acquired four banks from the FDIC. Other buyers of multiple troubled banks include U.S. Bancorp (USB, Fortune 500), the Minneapolis-based bank that last year bought the remains of troubled thrifts Downey Savings and PFF, which failed on the same day. The joint purchase of Downey and PFF wound up being the third largest deal by assets for failed banks last year, after the WaMu and IndyMac sales. FDIC rules require the agency to resolve bank failures in the manner that’s least costly to the deposit insurance fund. The deposit fund is backed by fees paid by banks, but the FDIC has a credit line with the Treasury Department that it could tap in an emergency. The rash of failures over the past year and a half has come at heavy cost to the fund, which is now 75% below its statutory minimum balance. The cost to the FDIC fund in the U.S. Bancorp and Zions deals alone was 3.6 billion. The agency also agreed to so-called loss-sharing agreements on some of the transactions, which means the fund could end up shouldering additional costs on troubled assets taken on by the acquirers. It’s this provision — capping the acquirer’s losses at the expense of the fund — that is most alluring to regional banks and their investors. Strong regional banks “should benefit from picking up relatively attractive deposit franchises with low or no credit risk given the FDIC loan guarantees that have so far accompanied these deals,” Morgan Keegan analyst Robert Patten wrote in a note to clients this month. Patten pointed to Cincinnati’s Fifth Third (FITB, Fortune 500) and Atlanta’s SunTrust (STI, Fortune 500) as two of the banks that might be chosen to participate in future deals, while Keefe analysts said U.S. Bancorp and BB&T (BBT, Fortune 500) could be singled out as buyers of more failed banks. Some bankers have downplayed questions about buying failed institutions. Such deals “really are off our radar,” Fifth Third chief executive officer Kevin Kabat told investors last week, noting that there have been relatively few bank failures in the Midwest.But given the advantageous terms, no one is ruling FDIC-assisted deals out, either. U.S. Bancorp chief executive officer Richard Davis said in a conference call with analysts and investors last week that the bank “will always be available” for any “opportunities that come along” on the FDIC failed bank list, though it is keeping an eye out for bigger ones.

NEW YORK: Americans may be saving more nowadays, but they certainly aren’t getting paid for it.Over the past year, interest rates offered by banks on a wide variety of accounts have steadily declined, only to sink to their lowest levels in years in recent weeks.A survey by Bankrate.com published this week revealed, for example, that rates on a six-month certificate of deposit stood at 0.77% – the lowest level since the firm started tracking data in January 1984.Attractive rates are even tough to come by for consumers willing to part with their money for a longer period of time. Depositors putting their money in a 5-year CD earn, on average, a 2.16% annual return on their money.With deposit rates that low and banks being able to charge much higher interest rates to people looking to borrow money, many banks are generating sizable returns from their lending business.During the first quarter alone, U.S. banks and thrifts earned 99 billion on loans, an increase of 4.7% compared to the same period a year ago, according to the Federal Deposit Insurance Corp. “That has been a pleasant reality for a lot of banks,” said Curtis Carpenter, managing director of Sheshunoff & Co. Investment Banking.Times have changedIt was not long ago that banks were trying to lure consumers with some eye-popping deals in what was a fierce battle for deposits.Back in early 2007, online banks like ING Direct, for example, were offering new customers a 3% yield for its Electric Orange checking account. HSBC Direct, the online banking arm of British bank HSBC, were paying customers a 6% yield on money kept in online savings accounts. Nowadays, consumers parking their cash in some of those same accounts are fetching just a fraction of what they did two years ago. HSBC’s online savings account, for example, currently offers an annual rate of just 1.55%.0:00
/1:21Dump your bankMuch of that decline was driven by the Federal Reserve’s decision to start cutting interest rates in the middle of 2007 in an attempt to keep the U.S. economy afloat. The Fed slashed rates to near zero percent last December and have left them there since then.But at the same time, banks have had little incentive to raise rates.Following the drastic plunge in the stock market last fall, consumers have piled into the security of U.S. Treasury bonds and cash in the hopes of merely preserving their savings. Even a paltry 0.5% return in a savings account was much more attractive to some consumers than watching their money fritter away in stocks.Last year’s decision by the Federal Deposit Insurance Corp. to raise its coverage limits to 250,000 per account also offered a greater sense of security for people willing to stash their money in a bank account.At the same time, banks have been relatively reluctant to make a lot of new loans as the recession drags on, making the need to attract more deposits less urgent, notes Kevin Fitzsimmons, a regional bank analyst at Sandler O’Neill & Partners.”None of these companies are really growing their balance sheets all that aggressively,” Fitzsimmons said. “They do not need deposits so badly.”Reacting to ratesBut it’s what the Federal Reserve does with monetary policy in the coming months that will ultimately determine where CD and savings account rates go from here, according to experts.Fed chairman Ben Bernanke indicated to lawmakers during his semi-annual address to Congress this week that an increase in interest rates was unlikely any time soon. As a result, interest rates on some short-term savings accounts could move even lower. Greg McBride, a senior financial analyst at Bankrate.com, said that the rates on accounts with shorter maturities are particularly likely to fall further. The rate for a one-year CD is hovering just above its record low rate of 1.04%, which was last reached in July of 2003. “We are going to get there,” McBride said. At the other end of the spectrum however, there are signs that bankers are already gearing up for an eventual rate hike. This week, the national average for 5-year CDs moved off their lows of 2.15%, according to Bankrate.com’s latest survey.What that ultimately means, said Sheshunoff’s Carpenter, is that banks will one day be at it again, trying to poach one another’s customers for their deposits.”As the economy heals and problems in the banking industry go away, competition is going to return,” he said.That day can’t come soon enough for savers.Talkback: Are you frustrated by low rates offered by banks for savings accounts? Share your comments below.

NEW YORK (Fortune) — Regional banks can no longer ignore the elephant in the room — their exposure to the commercial real estate bust.Though housing markets remain weak, analysts expect credit problems over the next year to center on commercial real estate — mortgages on office and apartment buildings and shopping malls, as well as construction, development and industrial loans. U.S. banks hold some 1.8 trillion worth of commercial loans, according to Federal Reserve data. Big regional banks, including PNC (PNC, Fortune 500) of Pittsburgh, KeyCorp (KEY, Fortune 500) of Cleveland and BB&T (BBT, Fortune 500) of Richmond, Va., have more than half their loan books in commercial loans. With financing markets locked up and the economy still mired in recession — unemployment is at a 26-year high while capacity utilization, a key measure of industrial production, recently hit a record low — observers fear a wave of loans will go bad in coming quarters. “The problems facing commercial real estate are severe and will likely take many years to resolve,” Deutsche Bank analyst Richard Parkus told the Joint Economic Committee of Congress this month. He said the biggest losses are likely to come from banks’ 550 billion of construction loans, such as loans to homebuilders.Banks are already bracing for impact. Higher credit costs led to second-quarter losses at banks ranging from Atlanta’s SunTrust (STI, Fortune 500) to Delaware’s Wilmington Trust (WT). Zions Bancorp (ZION), which operates primarily in Utah, California, Texas and Nevada, was among those forecasting deeper losses on problem commercial real estate loans. “It is still a pretty crummy economy out there and we are seeing deterioration in all of it,” Zions Bancorp chief financial officer Doyle Arnold said in a conference call with analysts and investors. Accordingly, banks have been adding to their reserves for future credit losses. But with more borrowers falling behind on their loans, it’s not clear that these so-called reserve builds will be enough.SunTrust, for instance, added 161 million in the latest quarter to its loan loss reserve, citing continuing housing market deterioration and “increasing economic stress in the commercial market.” But nonperforming assets rose even more, jumping to 4.48% of total loans from 2.09% a year earlier. As a result, the bank’s loan loss reserve tumbled to 55% of nonperforming assets from 70% a year earlier. Investors like to see a number nearer 100%. BB&T, for instance, has 101% coverage.Thin reserves mean SunTrust “may face material provisions ahead,” according to a report from analysts at research firm CreditSights. That could take a toll on profits over the next year. Similar trends are playing out at Comerica (CMA), whose loan loss reserve has fallen to 78% of nonperforming loans from 91% a year ago, and Zions, which fell to 65% from 79%. The increase in nonperforming assets comes as some real estate players complain that banks are sitting on bad loans rather than liquidating them — a trend they claim is suppressing new lending and compounding the problems in a falling market. 0:00
/3:05Commercial real estate’s decline”The rate at which these troubled loans are being resolved has been sluggish,” James Helsel, treasurer of the National Association of Realtors, told the Joint Economic Committee July 10. “Over 60 billion in assets have become distressed this year but only 4 billion worth of commercial loans have been resolved so far.” Though the banking industry succeeded in raising tens of billions of dollars in new equity in the second quarter, some expect the financing picture to remain cloudy, adding to price declines. Office rental rates have fallen 23% in New York and 11% in Washington from their 2008 highs, commercial property manager Jones Lang LaSalle said in its monthly market perspective newsletter this month. Meanwhile, office vacancy rates jumped to 14% in Manhattan and 11% in Washington in the first quarter, reflecting the economic slump. “Debt will remain constricted as banks continue to adopt the ‘delay and pray’ approach to their real estate holdings, extending loan terms in the hope that better economic conditions will obviate the need to foreclose,” Jones Lang LaSalle said in its report. For their part, bankers blame the problems on weak loan demand and deny they’re kicking the can down the line on troubled credits.”We are managing these problem loans effectively,” Comerica chief executive officer Ralph Babb said in the bank’s second quarter earnings statement. Still, the banks have underestimated their problems before. Comerica forecast in January that this year’s credit-related charge-offs, or writedowns of uncollectible loans, would be in line with last year’s level of 472 million. But the bank said last week that charge-offs were 405 million in the first half alone, with even “modest” improvement not expected until the fourth quarter.

Source:CNN