Snapshot: asset quality: the whole picture.

The question that won't go away is, "How is asset quality in the banking sector?" The question is generally motivated by the belief that banks are on the verge of some calamity that is somehow coupled to a decline in the housing market. Banking is far larger than just 1-4 family housing, however,

So the answer to the question is that, if one measures asset quality by the ratio of net charge-offs to average loans on an annualized quarterly basis, it is fine. Further, if one looks at the run rates for the major-exchange-traded banks and thrifts over the last three years (see the chart--data have been smoothed to reduce seasonal effects) you would see that the industry has been operating at below-normal levels. Recent behavior, however, suggests a return to normalcy.

The long and short of it is that during the last few years asset quality has been pristine. Historically low funding costs made it easier for borrowers to meet the payment demands, and the economy, buoyed in some part by the housing boom, was robust; recent economic data suggests it is still robust. The chart does show that over the past few quarters some of the shine has come off, however, but asset quality is still fine.

--John McCune, SNL Financial. jmccune@snl.com

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