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Bank profits are highest in nearly 5 years

May 24, 2012: 11:59 AM ET

FDIC report shows lending continues to lag the recovery.

FORTUNE -- The financial crisis could be over, but it's not clear the credit crunch is.

On Thursday, the FDIC said that bank profits were the highest they have been in nearly five years. U.S. banks earned $35.3 billion in the first three months of the year. That was up $6.6 billion from the same quarter a year ago, and nearly double what they earned two years ago. Still, bottom lines have yet to return to pre-crisis levels. Banks earned $1.4 billion less than they did in the second quarter of 2007, which is about the time the sub-prime mortgage market began to bust.

MORE: Welcome to the mortgage free housing recovery

What's clear is that banks are continuing to heal from the financial crisis. The number of banks that the FDIC says are in jeopardy of failing dropped to 772. That was the fifth quarter in a row that number has dropped. The FDIC's "problem bank" list once neared 1,000. What's more problem loans at all banks fell as well. The FDIC said banks charged off $21 billion in the first quarter, which the lowest in four years. A key FDIC measure of bank capital - the amount of money banks have to cover bad loans and other losses - reached an all-time high, which is welcome news but also begs the question of why it wasn't higher in the years before the crisis, when we all believed banks were healthy.

MORE: FDIC says it's ready for the next Lehman

Stability of the banking sector is clearly a positive for the U.S. economy. It's always one of the talking points you hear from strategists when they reel off the reasons they think stocks are headed higher. But bank profits alone are really only one of those things that are not a negative. The only reason banks profits really matter to you and me and the economy is that it should lead to more lending, and in turn more jobs and higher housing prices. We haven't actually seen that yet, at least not consistently. As I wrote a few weeks ago, lending shrunk in the first quarter. The FDIC report confirms that fact. The biggest drops were in credit card lending and home loans. That means banks remain a headwind for the housing market rebound. We're still not out of the woods yet.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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