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July 25, 2008 5:36:49 PM CDT

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Banks Face New Loan Crisis: Rebuilding Reserves

Posted Apr 22, 08 12:17 PM CDT in Business 

(Newser) – Within Bank of America’s disappointing first-quarter earnings was an unwelcome harbinger for the banking industry, the Wall Street Journal reports. BofA’s results were dragged down by huge additions to its loan-loss provision, an expense many other banks will also record soon. Given current credit conditions, many banks will have to increase their bad-loan reserves, dragging down their earnings.

All banks have money set aside against loan defaults. Putting more money into that reserve counts as an expense on the balance sheet, hurting earnings. Investors know all about loan-loss provisions, but they often underestimate their impact. Most were blindsided by the size of BofA’s big $6 billion provision, which far outstripped its $1.31 billion in trading losses.

Source Wall Street Journal

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A woman walks by a sign outside of a Bank of America branch office April 21, 2008 in San Francisco, California.   (Getty Images)
A sign is seen outside of a Bank of America branch office April 21, 2008 in San Francisco. Bank of America, the nation's largest retail bank, reported a 77 percent drop in first quarter earnings.   (Getty Images)
A customer uses an ATM machine at a Bank of America branch office April 21, 2008 in San Francisco, California.   (Getty Images)
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