Comptroller of the Currency Thomas Curry is concerned banks are padding profits by releasing too much of their reserves for loan losses.
Collective bank earnings increased higher than the year before for 12 straight quarters now, he told a Wall Street lobbying group the Financial Services Roundtable this week. This shows a finance industry recovering well from the crisis, but he said banks are adding provisions to their reserves at historically low levels, and it remains below what losses they’re charging off.
“I worry that too much of the increase in reported profits is being driven by loan loss reserve releases,” Curry said in his speech.
Banks earned a collective $34.5 billion in the second quarter, up 17% from one year ago, according to the Federal Deposit Insurance Corp.
At the same time, loss provisions declined by more than 26% to just over $14 billion while operating revenue increased less than a full percentage point, FDIC data also shows.
He added allowances could return to historic lows in “just a few years,” while banks and thrifts are still taking “elevated levels of risk.”
“In the U.S., the housing market is soft and unemployment remains stubbornly high,” Curry said. “The economy is taking much longer to emerge from this downturn than from past recessions. With so much uncertainty here and abroad, the industry needs to maintain strong reserves.”