Rate of Bank Chargeoffs Exceeds that of Great Depression

Reuters reports the rate of loan charge-offs by major U.S. banks has exceeded those seen in the early years of the Great Depression.

Bank charge-offs — loans that have been written off as unrecoverable — and which according to a Moody’s report climbed to $45 billion in the 3Q from $40 billion in the 2Q, have reached $116 billion year to date, or 2.9% of outstanding loans on an annualized basis. By comparison, notes the paper – citing Moody’s, bank charge-offs were about 2.25% in 1932, the third year of the Great Depression.

On an annualized basis, charge-offs were about 3.4% of outstanding loans in the 3Q, matching the Great Depression peak in 1934, Moody’s said.

Perhaps more than any other statistic, charge-offs represent the magnitude and severity of the crisis, while evidencing once again the excessive greed and lack of prudence among both lenders and borrowers.

Since the anticipation is for higher credit and funding costs, which may in turn force a re-pricing of credit risks and, by extension, a contraction of liquidity for corporates and households ; Moody’s said it “believes earnings prospects for the fourth quarter of 2009 and for 2010 are bleak for many U.S. banks.”

While we may have indeed reached the bottom of this recession, there remain too many risks and uncertainties to conclude that the banking sector and the economy are on the rebound.

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