Reader Wendy pinged me with a question I have no answer for: What happened to the Fed data series on non-performing loans?
Here is the link: Assets at Banks whose ALLL exceeds their Nonperforming Loans (LLRNPT).
Reader Wendy writes …
The original series showed how banks always had 90% or above allowance for loan and lease losses until the 2008 financial crisis. It then dropped like a stone to 15%. It has been gradually struggling up since then and is now 35%.
The old data series showed how pathetically inadequate the reserves are and how slow the recovery (actually, non-recovery since about 2/3 of loan and lease losses are not covered!).
The new series makes the “recovery” look significant. I’m amazed that the Fed did this.
Mish, please take a look at this and comment to your wide readership.
Wishing you a very Merry Christmas,
Hello Wendy, Merry Christmas to you and all my readers as well.
I do not know when this happened, or why, so I cannot comment on that. However, I have a few historical charts to show from late 2009, and I have some thoughts on the data series following the charts.
Current Truncated Chart
Click on any chart for sharper image
To show you what Wendy is asking about, here are a few charts that I captured in 2009.
Assets at banks whose ALLL exceeds Nonperforming loans
Banks with Total Assets from $1B to $10B where ALLL exceeds Nonperforming loans
Banks with Total Assets from $1B to $10B (Pacific Region) where ALLL exceeds Nonperforming loans
Banks with Total Assets over $20B where ALLL exceeds Nonperforming loans
Remember that allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.
Description of Allowances for Loan & Lease Losses
To understand the importance of ALLL, inquiring minds are reading a description of Allowances for Loan & Lease Losses.
Businesses try to predict, on an ongoing basis, the amount of loss in their accounts. They take periodic charges to earnings to better match losses to periods when they occurred. Banks do this as well. They use current income, through the provision for loan and lease losses, to create and build a reserve to absorb losses.
The ALLL can be increased another way. When the bank collects on previously charged-off loans, the amount recovered goes into the ALLL.
Charged-off loans decrease the ALLL. If a bank decides it has overestimated its potential loss exposure, it can choose to reduce its ALLL and add the amount to its income. This is known as making “reverse provisions” for loan and lease losses, because the bank decreases the allowance, or reserve amount, rather than increasing the provision. It is rare for a bank to make a reverse provision, however, because of the imprecise nature of determining an appropriate reserve.
One last point to remember with respect to the reserve is that the ALLL is a general reserve. Therefore, even if a bank analyzes and estimates the loss on each loan, the allowance is there to absorb all losses in the loan portfolio and is not specific to a particular loan.
Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.
Mike “Mish” Shedlock
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