Have Banks Recovered From The Financial Crisis?

After a week of bank earnings announcements, Steve Inskeep talks to David Wessel, economics editor of The Wall Street Journal, about what if anything has fundamentally changed since the crisis. Are banks still too big to fail? Are we still at risk of another bank bailout?

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STEVE INSKEEP, HOST:

Let's stay with business news for a moment, though. The nation's biggest banks have been reporting earnings. And David Wessel of The Wall Street Journal is on the line to talk with us about what these figures say about the state of the banking industry, years after the onset of the financial crisis.

David, good morning.

DAVID WESSEL: Good morning.

INSKEEP: So are the banks back to health?

WESSEL: Well, they're certainly doing better, they're doing OK. We've got their first-quarter profit reports now and they're all over the map. Citi had a strong quarter - Citigroup profits were up 30 percent. A lot of trading profits. International business - a lot of cost-cutting there. Goldman Sachs had a good quarter. Other banks had increased profits but the stock market focused on their blemishes. Bank of America's core lending business was weak. J.P. Morgan and Wells Fargo had double-digit increases in profits, but the markets were worried that their mortgage business wasn't doing as well as it has been. Morgan Stanley had trouble in its big bond trading business. So there's little question that big U.S. banks are generally healthier than they were just a few years ago and they're certainly most - much, much healthier than the banks in Europe.

INSKEEP: Well, David Wessel, I'd like to know, after the financial crisis a lot of people felt frustrated, felt that the banking industry had us collectively trapped, because the big banks were too big to fail and so we collectively would have to bail them out in the future. Is that still the case?

WESSEL: It is still partly the case. Now, some things have changed. Banks are required to have much bigger capital cushions to absorb losses. That's supposed to make them less likely to fail, less likely they need taxpayer bailouts. The biggest banks have been forced to have an extra dollop of this capital. Essentially that's a penalty on size and it might discourage them from getting bigger.

INSKEEP: Mm-hmm.

WESSEL: The Dodd-Frank bill changed the rules. Sheila Bair, the former head of the Federal Deposit Insurance Company, is going around the country telling bank investors that if your bank gets into trouble, don't expect the taxpayers to bail out, you're going to lose your money. But there's still continuing skepticism that really the banks are big because that makes business sense. There's worry that the banks are big because people know that if you're big, you get bailed out if you get in trouble.

INSKEEP: So the presumption is that is still the case; they've made it a little bit harder for a bank to fail. But people imagine that if a bank fails, you just can't let a giant bank go under. It just can't happen.

WESSEL: Well, the question - we don't really know. So there are people that said look, we put all of these protections into the system, we're going to make it easier if a bank gets into trouble to close them down, we've required them to have more capital so if they have big losses they won't need to go to the taxpayers and we're OK. And there are other people who say look, that's just ridiculous. If one of these big global banks goes under, there is no way the people at the Federal Deposit Insurance Company - Corporation are really going to be able to take them over. And if we get into another crisis the government is just going to bail them out all again. And the only solution then is to have smaller banks.

INSKEEP: David, a few seconds here. Just one quick question. For years we've had discussions about banks not lending more, even as interest rates went down. As things seemed to improve, are banks lending more now?

WESSEL: Lending is slowly coming back. Banks are seeing more demand for note loans. We see their standards are still tight but they're easing a little bit. Consumer and industrial loans to businesses are up 12 percent over the past year but they're still not back to where they were before it was before the crisis and it's still hard for a lot of people to get a mortgage.

INSKEEP: David, thanks very much.

WESSEL: You're welcome.

INSKEEP: David Wessel is economics editor of The Wall Street Journal and has been our guide for years of financial ups and downs, and perhaps, a little bit of up again.

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