The FDIC’s quarterly banking report, QBR, came out yesterday. This report contains one of the CERF Indicators, which are a set of special economic indicators that we began tracking in the aftermath of the “Great Recession”. The CERF Indicator in the QBR report is net bank charge-offs. The other CERF Indicators are: the home ownership rate, credit spreads, and capacity utilization.

Net bank charge-offs rose with tremendous strength beginning in 2007 quarter 4, foreshadowing a large GDP contraction that was to occur about a year later. They peaked at $55 billion in 2009 Quarter 4. Bank charge-offs were less than $10 billion after the small 2001 recession and before the run-up to the Great Recession. When charge-offs are high, banks are not operating normally, especially, lending is constrained. This is because they have to spend an inordinate amount of time trying to collect on bad loans, and also the regulatory reporting requirements skyrocket in this situation. It is like a credit crunch on those parts of the economy that are dependent on bank lending. Think small businesses especially.

End of 2011 net bank charge-offs fell by about $1.35 billion dollars, the smallest fall in two years. The level of charge-offs is $25.4 billion dollars. We have argued that we need to get back to the $10 billion dollar range in order for the banking sector to begin functioning normally again. I expect that bank credit will continue to be muted for the first half of 2012.