“That has made it easier for banks to get back on their feet,” said Duffie, adding that banks should “have a hard time losing money on any prudent loans right now.” Now that the Fed has promised to keep rates at or near zero until 2013, Duffie said, banks “will be able to continue coasting for a couple of years.”
Of course, Fed officials do not want banks to coast; they want them to push money into the economy and stimulate growth. But no matter how low interest rates are, consumers might be too worried to borrow and spend.
“Investors and consumers have just been through a terrible financial crisis,” Duffie said. “They read about debt crises here and in Europe and say, ‘I think I’ll just sit on my money.’ ”
The New York banker who deals with commercial real estate said, “Every guy in the process of doing a transaction, unless the money was hard, is rethinking.”
That’s made it harder for banks to build sound new business while they struggle to resolve the problems plaguing their earlier business.
For starters, the ongoing housing crisis has continued to be a drag on many banks’ balance sheets. Facing underperforming loans, investigations into foreclosure practices and multibillion-dollar lawsuits over mortgage-backed securities, big banks continue to set aside billions to cover possible losses.
Some U.S. banks have also been stung by their exposure to the debt troubles brewing in Europe.
At the same time, new regulations arising from the Dodd-Frank law overhauling financial oversight are beginning to crimp some sources of bank profits. For instance, new rules limiting the fees that banks can charge merchants for purchases made with debit cards are set to take effect this fall, and many other rules have yet to be written.
Regulators have pressed banks to keep plenty of cash on hand and steer clear of the risky loans that contributed to the crisis, even as policymakers have continued urging banks to lend more to spur economic growth.
No bank illustrates the recent volatility and uncertainty about future earnings more than Bank of America, the largest bank in the country by assets.
Last month, the bank reported a quarterly loss of $8.8 billion, and the firm has faced persistent questions about its ability to manage its hefty portfolio of bad loans, particularly those attached to its purchase of Countrywide.
“There aren’t many days that I get up and think positively about the Countrywide transaction,” Moynihan said in a recent conference call.
In addition, Bank of America has been bombarded by lawsuits from investors who poured money into mortgage-backed securities that turned out to be worthless. Last week, insurance giant American International Group filed a $10 billion lawsuit over such losses. In June, Bank of America agreed to pay $8.5 billion to investors on similar claims, and even that settlement has been challenged as insufficient.