NEW YORK (Reuters) - The rate of loan charge-offs by major U.S. banks has exceeded those seen in the early years of the Great Depression as the credit crisis continues to take a toll, Moody's Investors Service said on Monday. Bank charge-offs -- loans written off as uncollectable -- have reached $116 billion year to date, or 2.9 percent of outstanding loans on an annualized basis, Moody's said in a report. By comparison, bank charge-offs were about 2.25 percent in 1932, the third year of the Great Depression, Moody's said. Charge-offs climbed to $45 billion in the third quarter from $40 billion in the second quarter and $31 billion in the first, Moody's said. On an annualized basis, charge-offs were about 3.4 percent of outstanding loans in the third quarter, matching the Great Depression peak in 1934, Moody's said. The charge-off totals cover banks rated by Moody's with more than $50 billion in assets. Moody's-rated banks hold 85 percent of the total assets in the U.S. banking system. Bad loans resulting from the global credit crisis have battered banks' profits and triggered an upsurge in the number of troubled and failed banks. Banks that took major write-downs on residential mortgages during the housing slump are now suffering losses from commercial real estate and business loans as well. The high costs of credit problems weighed heavily on banks' third-quarter results, Moody's said. "For most banks, third-quarter earnings were at best modest, and in many cases they recorded sizable losses," Moody's said. Since more credit costs loom, "we believe earnings prospects for the fourth quarter of 2009 and for 2010 are bleak for many U.S. banks," Moody's said. The charge-offs have already been incorporated into Moody's bank ratings, however, and will not trigger more rating actions, Moody's said. http://www.reuters.com/article/businessNews/idUSTRE59P3LM20091026
For an oversimplified example of why this may not be the end of the world: net expenses: -2.9% annual loss of all loans -.25% cost of Fed funds money -0-2% cost of CD/deposits money. net income: 6%+ interest charged (much higher with unsecured debt) on secured debt. 9% and higher on unsecured. This could go on for a long time and the banks would cash flow just fine... They may be technically insolvent right now, but on a cashflow basis they are definitely not.
Actually bank net interest margins only improved slighly since the crisis began(on small banks its actually down), even though the fed slashed 500 basis points Page 6 http://www2.fdic.gov/qbp/2009jun/qbp.pdf
St.Louis Fed has some insight on gross and net interest margins : http://research.stlouisfed.org/fred2/series/USNIM