Banks? loan loss reserve ratio falls to lowest level in eight years

With the nation's economy in decline and bad loans on the rise, the average loan loss reserve at U.S. banks fell to 129 percent of nonperforming loans as of Sept. 30, 2001, according to a Jan. 16 news release from Weiss Ratings Inc., a bank rating agency. That level is the lowest the loan loss reserve has been in eight years.

"Banks are still dragging their feet when it comes to adequately recognizing the surge in defaults and bad loans. The industry has started to acknowledge the need for higher reserves to cover the losses, but it's too little, too late as the growth in problem loans continues to outpace the growth in reserves," said Martin D. Weiss, PhD, chairman of Weiss Ratings.

According to the release, the United States' 9,701 banks and thrifts set aside a collective $30.2 billion in the first three quarters of 2001 for potential loan losses.

That amount was a 42 percent in-crease compared to the $21.3 billion set aside in the same period in 2000. At the same time, though, the industry's net loan charge-offs during the first three quarters of 2001 totaled $25.4 billion, which was a 50 percent increase compared to the $17 billion in loans charged off during the first three quarters of 2000.

Nonperforming loans

The release stated that nonperforming loans at banks and thrifts increased to 20.8 percent in the first three quarters of 2001 from $48.8 billion at year-end 2000 to $59 billion at the end of the third quarter of 2001. This puts the industry's nonperforming loan growth rate slightly ahead of the 26.6 percent increase experienced in 2000, and represents a sharp acceleration from the 2.9 percent in-crease in 1999.

"Until there is concrete evidence of an economic recovery, it's safe to say that banks' loan quality will continue to deteriorate over the coming year," Weiss said. "Fortunately most banks and thrifts are still generally well-capitalized, thanks to the last 10 years of strong earnings."

Weiss issues safety ratings on more than 15,000 financial institutions, including banks and thrifts, securities brokers, life and health insurers, health maintenance organizations and property and casualty insurers.

Weiss also issues investment ratings on more than 11,000 mutual funds and 9,000 common stocks. The ratings firm does not receive compensation from any of the entities it rates.