The U.S. banking sector reported record-high profits in the third quarter of 2018, thanks in large part to last year’s tax law.
Banks profited $62 billion in this year’s third quarter, up 29.3 percent from the same period the year before, according to data from the Federal Deposit Insurance Corporation. The federal bank regulator attributed about half those profits to tax cuts in last year’s reform law, which gave banks a lower effective tax rate.
Without tax reform, the FDIC estimates banks would still have seen a nearly 14 percent rise in profits from the year before, at $54.6 billion.
While the FDIC saw those figures as a net positive, FDIC Chairman Jelena McWilliams raised alarms over heightened risks from the U.S.’s unusually long recovery period from the 2008 financial crisis.
“While results this quarter were positive, the extended period of low interest rates and an increasingly competitive lending environment have led some institutions to ‘reach for yield,’” McWilliams said in prepared remarks delivered alongside the FDIC’s quarterly state of banking report on Tuesday afternoon. The Trump-appointed bank regulator said that competition to attract customers has increased, which could lead banks to loosen how much they are willing to loan to riskier customers, a pattern similar to the lead up to 2008’s economic meltdown, though perhaps not as severe.
Still, McWilliams warned, “These factors have led to heightened exposure to interest-rate risk and credit risk.”
In a separate statement issued on Thursday, McWilliams also announced that the FDIC would support the Federal Reserve Board’s recent proposal to tailor regulations for banks of up to $700 billion in assets.
The FDIC also announced a new proposed rule, required by a bipartisan financial regulatory reform law passed earlier this year, that would allow smaller banks of $10 billion or less in total assets to follow fewer regulatory rules in exchange for following a new capital standard.
“I am pleased to support this proposal,” said McWilliams. “This thoughtful approach to tailoring the application of prudential standards within the banking industry is something that we should continue to explore for banks of all sizes and risk profiles.”
Her predecessor as FDIC chairman and current board member at the regulator, Obama appointee Martin Gruenberg, criticized the proposal in a separate statement.
“[T]he risks posed by the failure of banking organizations with assets between $100 billion and $700 billion are substantial and, in my view, also underappreciated,” said Gruenberg, who added that he saw “no reason” to change banking regulations along the lines of the new proposal.
