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Banks Are Back in the Black

Signs of economic recovery are evident — if too marginal to celebrate — in GDP growth, housing and employment. But one bellwether has been more positive and less ambiguous than most, and it is a measure of that most embattled of business sectors: the banking industry.

In the lingering shadow of the financial crisis, traditional banks have fixed a lot of their balance-sheet ills, and their profitability is reaching new highs.

In January, JPMorgan Chase & Co. posted record annual earnings for the third year in a row, with 2012 net income of $21.3 billion, up 12 percent from 2011. Wells Fargo & Co. boosted its bottom line 19 percent, to $18.9 billion.

U.S. banks, taken as a whole, are riding high. In the third quarter of 2012, based on the most recent figures reported by the Federal Deposit Insurance Corp., they earned an aggregate $37.6 billion, the highest quarterly total in six years.

Globally, according to an International Monetary Fund report in October, banks have responded to “the need to replace depleted capital buffers, reduce risky exposures and adapt to changing market conditions” by making significant strategic choices and asset sales. Divestitures by the likes of Barclays, Citigroup and HSBC Holdings helped to reposition those companies for the next phase of recovery, while those sell-offs — including asset and derivatives portfolios, properties and whole business lines — “have presented others with lucrative investment opportunities,” the IMF said.

Not only are profits surging, but the outlook can only be brighter as the cyclical recovery continues. Yet bankers’ current and prospective successes seem disconnected from underlying economic conditions. They also seem disconnected from the warnings of JPMorgan CEO Jamie Dimon and other top executives who have been so outspoken in opposing new regulations. Do they have a point when they say that higher capital requirements will constrain bank lending? Will they continue to pile on the profits even when loans aren’t flowing?

Such issues and questions have caused the industry trouble before, with both public policy (the Dodd-Frank Wall Street Reform and Consumer Protection Act) and public relations (Occupy Wall Street) consequences. By some non-bottom-line measures having to do with their image and the way they do business, the bankers still have some deficits to make up.

The reality is that banks have always done pretty well. They have suffered through trying times and merged and restructured as conditions required, but in the end, as the economy prospered, they did too. All the debate over the Volcker rule, which separates the core banking functions of deposit-taking and lending from more-­speculative activities, only served to underscore a truism about banks’ most steady source of income and most visible contribution to the community: traditional lending.

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