Banks Warn of Fourth Quarter Hits
By M.R. Kropko, Associated Press Reporter
December 27, 2005, Cleveland, Ohio--National City Corp. could face a hit of up to $30 million in this year’s fourth quarter due to a surge of personal bankruptcy filings. The Midwest bank can draw a bit of solace – it’s not alone.
When banks report results for the fourth quarter early next year, many will have some huge charge-offs, or accounting for debts that can’t be collected. Those with wide exposure to consumer loans and credit card debt stand to make National City’s hit look like pocket change.
Bank of America, based in Charlotte, N.C., has estimated an increase of $400 million to $500 million in charge-offs, and San Francisco-based Wells Fargo & Co., which controls Wells Fargo Bank, estimated an additional $175 million.
It’s another hurdle in a tough year for Cleveland-based National City, which as been struggling with lower earnings due to a drop in mortgage banking revenue. National City operates banks primarily in Ohio, Indiana, Illinois, Kentucky, Michigan, Missouri and Pennsylvania.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes filing personal bankruptcy a more daunting task. Nationally, more than half a million people filed for bankruptcy in the 10 days before the new law took effect Oct. 17.
U.S. Bankruptcy Court totals show that in fiscal 2005, completed Sept. 30, there were more than 1.3 million Chapter 7 filings, up 17 percent from 1.1 million a year ago.
Chapter 7 is the bankruptcy provision most frequently used by individuals. It can involve the nearly complete liquidation of a debtor’s property.
The nation’s new bankruptcy law makes it more difficult for consumers to wipe out their debts and requires many people to repay some of their obligations.
The banks aren’t worried about the big fourth-quarter charge-off numbers.
Banks generally have set aside reserves to cover higher charge-offs. And they say the fourth quarter hits will be offset because there will be fewer charge-offs in the future – thanks to the new law.
“Really, what you are seeing is just a front loading of those filings,” said John Penn, president of the Alexandria, Va.-based American Bankruptcy Institute. “But it will be evened out over time.”
“I would not characterize it as a severe problem,” said Tom Richlovsky, National City vice president and treasurer. “More of a blip is probably the better way to describe it. It’s very much observable across the banking industry, given the bankruptcy law change Oct. 17.”
If there were ever a time when the banks could handle those kind of losses it would be in the current environment, when bank earnings generally are very strong, said Wayne Abernathy, executive director of financial institutions policy in Washington for the American Bankers Association, the largest banking trade association in the country.
“We suspect this surge is very temporary and in the following quarter you’ll probably see a tremendous drop in losses due to bankruptcies. Then I expect things will normalize,” Abernathy said.
The banking industry supported the new bankruptcy law.
“Wealthy people with means should be required to pay something on debts and not be able to walk away from them,” Abernathy said.
Blake Brewer, a personal bankruptcy lawyer in Independence, a Cleveland suburb, said he disagrees with anyone who may believe people go the bankruptcy route because big banks can afford to write off bad dept.
“The people who come to me for assistance would rather be anywhere else than in a lawyer’s office trying to file bankruptcy.” Brewer said.
“People come to see me as an absolute last resort. They come to see me when a spouse dies, or when there is a horrible medical condition for which they have no health insurance. People sit in my office and cry all day. They are not trying to take advantage of a situation,” he said.
© 2005 by the Associated Press. Reprinted with permission of The Associated Press. All rights reserved.
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