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Behind big banks profits, a sea change

Stan Alcorn Oct 14, 2014
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Wells Fargo, Citigroup and JP Morgan Chase all reported earnings Tuesday morning. The results were more or less what analysts expected, with two banks barely beating expectations, and JP Morgan Chase barely missing. But all three are profitable, with gains in the single-digit billions of dollars for the quarter.

“The return to profitability by banks of all sizes is a good thing for our economy,” says Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center. “It shows that loans are being made and repaid.”

But the more significant change since the financial crisis is the quality of those loans. “You’ve seen a significant reduction in lending to individuals who are outside the traditional credit box,” says Klein.  

Safer loans are part of a broader sea change in bank processes that have reduced risk, sometimes at the cost of profits. 

“I would say [the big banks are] far safer, better capitalized today than they were before the crisis, but they certainly aren’t as profitable,” says Fred Cannon, global director of research at KBW. 

In addition to making safer loans, banks have been forced to spin off risky “proprietary trading” desks, and to increase capital or equity. The latter directly impacts one key measure of profitability: Return on equity.

“Citigroup is a good example,” says Cannon. “Before the crisis, because they didn’t have much equity, the returns on equity, were you know in the mid-twenties. And today, Citigroup struggles to make it to 10 percent.”

A less profitable Citigroup, but a safer financial system?

“So that’s the good news,” says Dennis Kelleher is the president of Better Markets, an organization that  pushes tighter regulation of the financial industry. “The bad news is if those circumstances repeat themselves, we’re not in dramatically different  position than we were in ’08.”

The problem, he says, is that while the big banks may be less likely to fail, if they do fail, they’re still too big to avoid having taxpayers bail them out.

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