Why Banks Can't Lend: U.S. Financial System "Not as Good as Wall Street Says"

Forget the unemployment rate, durable goods orders or the Baltic Freight Index. Veteran market watcher Richard Suttmeier says the FDIC quarterly banking profile is "the single most important leading indicator for the U.S. economy."

Released about 55 days after the end of each quarter, the FDIC report offers a bird's eye view of lending activity in America, especially among smaller Main Street lenders and small businesses. "It's a balance sheet of our economy," says Suttmeier, chief market strategist at Niagara International Capital and ValuEngine.com.

Based on the latest quarterly profile, for fourth-quarter 2009, the state of the banking system is "not as good as Wall Street is saying. Particularly when you get beyond the 'too big to fail' banks," Suttmeier tells Aaron in the accompanying clip.

Bad Banks Can't Lend As was widely reported, the most recent report showed the number of "problem" banks rose 27% in 2009 to 702 -- the highest level since 1993.

Less widely discussed is Suttmeier's concern that more than half of the nation's roughly 8,000 banks "can't lend anymore" because of rising levels of bad loans on their books. The problems are especially acute in construction & development and commercial real estate loans, he says, citing the FDIC quarterly report. Because so many of these loans are delinquent, banks don't have the capital coming in to lend out and thus are content to mostly sit on deposits, he explains. 

"We can't sustain positive GDP growth without the construction market turning around [and] banks getting rid of these bad loans so that they can lend again," Suttmeier says. "When you have light demand for loans and loans on the books deteriorating while the economy's going up -- something's not right."  

FDIC under strain. Meanwhile, the Federal Deposit Insurance Corp.'s fund has been dwindling, hitting a $20.9 billion deficit as of Dec. 31, as the AP reports. Suttmeier says TARP funds repaid by bailed out banks should be used to shore up the FDIC's fund, rather than raising fees for banks, which will leave them with less capital to lend.

To be clear, the FDIC has a $500 billion line of credit with the U.S. Treasury, and Suttmeier doesn't see much risk of the FDIC changing (or being unable to cover) its $250,000 guarantee for individual deposits. Suttmeier isn't an alarmist and doesn't see run on the banks as started to occur in late 2008 in the depths of the global credit crisis. However, one trend is clear: "We have to find funding for the smaller banks," he says.

Nothing less than positive GDP growth and a sustainable U.S. recovery are at stake.