Have US banks made sufficient loss provisioning to cover their loans? This chart tells us that they haven't.
First, a warning, this is a difficult chart to explain and understand. However, it is well worth the effort to see what it is telling us about the US banking system.
So here goes....
The US Federal Financial Institutions Examination Council assesses whether banks make sufficient allowances for losses. In the bank supervisory reporting system, this number is called the "allowance for loan and lease losses" or the ALLL.
In order to make this assessment, the FFIEC looks at each bank and divides the ALLL by non-performing loans. If the ratio is greater than one, then the bank has things covered. If it is less than one, the bank has insufficient provisioning.
Here it gets a little more complicated. There are big banks and there are little ones. This chart takes account of that rather obvious fact. It separates those banks that have a ratio greater than one from the under-provisioning banks. It then takes the sum of all assets held in those good banks and divides it by the total assets of the banking system.
So what is this chart telling us? Currently, only 19 percent of assets are held in banks that have a ratio greater than one. In other words, the US banking system as a whole has insufficient allowance for losses.
This is why US banks are scrambling to increase their loss provisioning. In turn, provisioning is costly, and this is going to keep the US banking system severely depressed for a long time to come.