For all the encouraging signs on the credit-quality front, for all the uncertainty cleared up by the completion of Senate debate on financial reform, there remains a discouraging question mark of a trend that is keeping bankers from breathing a sigh of relief: unemployment.

The persistence of unsettlingly high unemployment is hampering the success rate for consumer loan restructurings, and making it more difficult to judge new credits or loans coming up for renewal, according to bankers. A 9.9% unemployment rate also gives pause even to the best-capitalized banks when it comes to considering dividend increases or other moves that could hurt the ability to absorb future credit losses.

Forecasts for the labor market hint at a modest recovery. But the evidence of improvement probably won't be resounding enough, or widespread enough geographically, to elicit a collective exhale from the industry anytime soon.

A jobs report on Thursday contributed to a pullback in the stock market as the Labor Department announced that initial jobless claims rose by 25,000 in the week that ended May 15, to 471,000, the highest level in a month. Economists surveyed by Bloomberg News had expected to see a decline. And while the national unemployment rate is expected to continue falling from the 26-year high of 10.1% reached in October, Moody's expects unemployment a year from now will be higher still in states like Michigan, New York, Nevada, Ohio and South Carolina.

It is not just the rate of unemployment that bankers and economists alike find disconcerting. It also is the duration of unemployment for those in search of a job.

"Something like 7 million workers have been out of work for more than 26 weeks, and more than 4 million of those for more than a year. That is really unprecedented," said David Resler, chief U.S. economist at Nomura Securities International Inc. in New York.

In that kind of environment, banks are having all the more difficult a time finding alternatives for borrowers who are behind on their payments.

Richard K. Davis, the chairman and chief executive of U.S. Bancorp in Minneapolis, told investors at the UBS global financial services conference on May 11 that two-thirds of the retail customers undergoing loan restructurings "are going to continue to fall back into harm's way."

He was unequivocal about the reason why.

"Unless you get to the systemic, core issue, which is you need to make money to pay off your debt, we can do a lot to restructure that payment, we can take down the principal, but … until that unemployment rate starts to come down — and I understand from the Federal Reserve it's not likely to be down below even 8% at the end of next year — we're going to be suffering the consequences of this, unable to help people through to the other side no matter what we do," Davis said.

Jeff Weeden, the chief financial officer of KeyCorp, cited the jobs picture at a Barclays Capital conference last week in response to a question about loan demand.

"Typically the end of the first quarter and into the second quarter begins the renewal season, as you have refreshed financial statements from all of our middle-market customers. One of the things that is still of a concern is the high level of unemployment in the U.S., and that's going to continue to have somewhat of a dampening effect," Weeden told the London audience. But he said that KeyCorp, based in Cleveland, was nonetheless encouraged by the increase in loan inquiries from potential customers and by signs of improved retail sales and consumer confidence.

At JPMorgan Chase & Co., "several months of actual improvement in U.S. employment" was one of the three things Chairman and CEO Jamie Dimon's annual letter to shareholders said must happen before the company would increase its stock dividend. (The other conditions were a "significant reduction" in consumer chargeoffs and additional certainty on bank capital requirements.)

After holding steady at 9.7% in the first three months of the year, unemployment unexpectedly ticked up to 9.9% in April. But a Labor Department report released Friday showed that the rate actually fell in 34 states last month and rose in only six, suggesting the negative momentum was not widespread.

Michigan's labor market remains the weakest, with the April unemployment rate at 14%.

The bad news in Michigan did not keep Fifth Third Bancorp of Cincinnati — which has suffered a disproportionate amount of loan losses in Michigan and in Florida — from reporting improved overall trends last quarter in chargeoffs, nonperforming assets and delinquencies. This quarter Fifth Third expects stable NPAs and a $100 million reduction in chargeoffs, the company announced last month. But in reiterating that outlook at the UBS financial services conference, Fifth Third's chairman and CEO, Kevin T. Kabat, reminded his audience that the expectations assume that "economic conditions remain consistent."

Whether they will is a big question that largely turns on the jobs picture.

Meredith Whitney, the former Oppenheimer & Co. bank analyst who now runs her own, eponymous firm, warned last week that a restricting of credit tied to increased regulatory costs and a new set of austerity measures by cash-crunched state and local governments could trigger a new wave of joblessness.

State and local government jobs "have ballooned to 15%" of U.S. employment, she wrote in The Wall Street Journal. "However, over the next 12 months, disappearing state and local government jobs will prove to be a meaningful headwind to an already fragile economic recovery."

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