WASHINGTON, Aug 29: US commercial banks earned a record $23.4 billion in the second quarter of 2002 as profits from interest rates outweighed losses from bad debt, the Federal Deposit Insurance Corp (FDIC) said on Thursday.

“The second quarter banking results show that the benefits of low interest rates and a steep yield curve outweigh the costs of higher credit losses,” said Don Inscoe, associate director of the FDIC’s insurance and research division.

The previous record was $21.7 billion in the first quarter of the year.

The industry’s average return on assets, a basic yardstick of its profitability, rose to 1.41 per cent in the quarter from 1.21 per cent a year earlier and 1.33 per cent in the first quarter of 2002. The latest return on assets matched an all-time high reached in the third quarter of 1999.

The number of banks receiving low scores on tests for capital adequacy, asset quality and other criteria the FDIC examines increased to 115 from 102 in the previous quarter. Assets of so-called problem banks declined to $35.9 billion from $36.7 billion.

Credit losses increased to $10.5 billion in the quarter, up 33 per cent from a year ago in the same three-month period. Worst hit were commercial and consumer loans, the bank regulator said.

The rise in losses in the commercial sector was to be expected as a result of the high number of corporate bankruptcies that occurred in the second quarter, the FDIC said.

But mounting bad credit card debt is a bigger worry because personal debt is high and the economic recovery is uncertain, bank regulators said.

At the same time, the fact that the industry could post such strong results in spite of the US economic downturn underscores industry strength, Inscoe said. In the 1990-91 recession, credit losses depressed earnings, contributing to hundreds of bank failures, he said.

“The overwhelming majority of FDIC-insured institutions display the kind of balance sheet and earnings strength that will allow them to support the economic recovery by lending to credit-worthy businesses and consumers,” the FDIC said in a statement.

Interest rates were the key to strong bank earnings in the quarter. The average monthly difference between the yield on 10-year and 6-month Treasury debt instruments was 3.38 percentage points — a spread that has been surpassed in only eight quarters since 1960 and has not been bigger since 1992, the bank regulator said.—Reuters