The subprime loan debacle has unleashed a chain reaction of bad loans, layoffs and bankruptcies throughout the banking industry.
U.S. banks suffered their largest jump in loan delinquencies since 1991 in the second quarter as past-due payments shot up 36 per cent over last year to $11.4-billion (U.S.), according to a report yesterday by the U.S. Federal Deposit Insurance Corp.
FDIC chairwoman Sheila Bair acknowledged that some banks are experiencing "earnings challenges," but she insisted the industry is healthy and strong in spite of the continuing credit crunch.
"The banking industry is generally very well-capitalized," Ms. Bair told reporters in Washington. "It's well diversified. It's profitable, and I think banks are in a very good position as we are going through this period of market readjustment."
Still, the latest figures illustrate the strains facing the entire financial services sector.
Loan writeoffs shot up 51 per cent to $9.16-billion, profits fell 3.4 per cent and the number of banks losing money jumped to 824 from 600, according to the FDIC.
"Current conditions do underscore that regulators must be vigilant and banks need to follow sound risk-management practices," Ms. Bair added.
And even as Ms. Bair preached stability, three more large mortgage lenders said yesterday they're getting out of the business - Lehman Brothers Inc. unit BNC Mortgage LLC, Accredited Home Lenders Holding Co. and a subsidiary of London-based HSBC Holdings PLC.
They join at least 90 lenders who have abandoned the troubled mortgage market in recent months, according to figures compiled by Bloomberg.
U.S. mortgage lenders and brokers are typically state-regulated.
The latest shutdowns come in spite of recent efforts by the U.S. Federal Reserve Board to inject much-needed liquidity into the short-term debt market. The four largest U.S. banks - Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and Wachovia Corp. - disclosed yesterday that they have each tapped $500-million from the Federal Reserve's discount window on behalf of clients.
Last Friday, the Fed cut the rate on these emergency borrowings to 5.75 per cent from 6.25 per cent, and urged banks to use it. But it wasn't known until now who was borrowing, and how much.
In a joint statement, JPMorgan, Bank of America and Wachovia said they wanted to show the "effectiveness" of the discount window. Citigroup added that it's "pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients."
Meanwhile, Lehman Brothers said it's shutting down BNC Mortgage, its subprime unit, because of current market conditions and taking a $25-million charge. The closing affects about 1,200 employees in 23 U.S. locations.
Accredited Home Lenders of San Diego said it has stopped making home loans, and will cut 1,600 related jobs and close its 60 branches effective Sept. 5.
"These difficult decisions were made out of necessity in light of the continued and widely publicized turbulence in the mortgage and financial markets," Accredited chief executive officer James Konrath said in the statement.
HSBC, Europe's No. 1 bank by market value, said it would eliminate 600 jobs and close an office in Carmel, Ind., as it too retreats from selling home loans in the United States.
Meanwhile, H&R Block Inc. said its Block Financial Corp. subsidiary has tapped an $850-million bank credit line after failing to raise funds in the short-term debt market.
"The credit markets have become increasingly constrained and unstable," H&R Block chief financial officer William Trubeck said in a statement.
H&R is among more than 20 U.S. companies that have been effectively blocked from tapping into the once-thriving market for short-term asset-backed corporate debt - particularly debt backed by mortgages.
Meanwhile, First Magnus Financial Corp. has become the 14th lender since December to seek bankruptcy protection. Two days ago, Capital One Financial Corp. closed its GreenPoint Mortgage unit, eliminating 1,900 jobs.
The fallout has also spread to European hedge funds. Capital Fund Management, a Paris-based hedge fund manager, said its Discus Master Fund could lose as much as 27 per cent of its assets, or $407-million, as a result of the bankruptcy of cash-management firm Sentinel Management Group Inc.
Barrie McKenna