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Outlook for banks improving over last year

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Steve Chiotakis: JP Morgan Chase bank reports its earnings today. Tomorrow it’s Citigroup and Bank of America. The big financials were making loads of money earlier this year on trading in the markets. And even though the Dow’s slumped since then, most banks are still expected to be in the black. Unlike one year ago. Here’s Marketplace’s Mitchell Hartman.

Mitchell Hartman: It was a little over a year ago that the Treasury’s stress tests found 10 of the 19 biggest U.S. banks likely couldn’t weather a severe recession.

Stuart Greenbaum: What we had a year or more ago was a panic, a full-scale panic.

Stuart Greenbaum is professor emeritus at the Washington University business school:

Greenbaum: We’re not in that kind of an environment right now.

Greenbaum says back then, banks were weighed down with bad home loans. The economy was shedding half-a-million jobs a month. Now foreclosures have peaked, loan losses are less scary, and profits are improving.

Greenbaum: Our corporations, many of them are doing reasonably well. And the banks are gradually being restored. They’re euphoric.

But would they be so euphoric if we stress-tested them again? I put the question to Erik Oja, a bank analyst at Standard and Poor’s:

Erik Oja: If the stress tests were given right now, I think that they would do a little bit better.

Oja says that’s pretty good, considering unemployment actually shot much higher than the stress tests assumed. And, Oja says, banks did what the government told them: raised lots of cash. But if they’re so flush, shouldn’t they be lending some of the money back out? Washington University’s Stuart Greenbaum says not really:

Greenbaum: You know, they’re criticized for not making more loans. They’re happy to lend to small businesses if the quality of the loan applications are there.

The way he and the banks see it, they’re probably better off sitting on their money than making risky loans in a bad economy.

I’m Mitchell Hartman for Marketplace.

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