Thursday, September 24, 2015

Banks Are Still Holding Lots of Bad Loans

Seven years after the start of the financial crisis, banks are still holding big distressed loan portfolios. FDIC reports that as of June 30, 2015, non-current loans and other bank owned real estate totaled $162 billion.  That's a 63% decrease from mid 2010.  But it's nearly three times the $56 billion banks reported just before the crisis in mid 2006.

Why banks have held onto so many bad loans is not entirely clear.  One explanation might be that low interest make alternative investments relatively unattractive.  Non-current loans that are paying something may be more attractive than a sale to a distressed debt buyer and reinvestment of cash into low yielding alternative investments.  Many banks are holding non current loans because they are required to do so as part of loss sharing agreements with the FDIC. 

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