Recent consumer borrowing and spending data has me convinced that the road to recovery is going to be a long one.  The duration of the banking crisis, however, is still up in the air.  The extreme improvement in credit indicators leads me to believe that the worst of the banking crisis is likely over.  The extent of the sector’s recovery is still very much in doubt though.  A recent report out of S&P says the banks could remain under substantial pressure until 2013 or 2014.  Reuters reports:

NEW YORK (Reuters) – A day after saying big U.S. banks probably needed to raise only one-fourth the capital demanded by the government, Standard & Poor’s said the nation’s banking crisis has “merely entered a new phase” and might not end before 2013.

The credit rating agency said the industry is being propped up by hundreds of billions of dollars of government support, especially for lenders considered too important to the financial system to fail.

Unfortunately for the banks, much of their future performance is dependent on the aforementioned weak consumer.  It takes two to borrow and in this case the consumer just isn’t that eager to pile back into debt.  The banks may have entered a less risky phase of the crisis (as the banks in Japan did after about 18 months), but recovery was still in the offing.  According to S&P’s Tanya Azarchs:

“Banks are far from a recovery, and the banking crisis has merely entered a new phase.   Although our analytical time horizon for losses extends only through 2010 … there’s nothing to say that this banking crisis can’t go on for another three or four years.”

S&P  says there are a number of factors still hindering the banks:

• Industry risk is generally creeping higher rather than stabilizing;
• Losses during this downturn will likely be greater than the industry thought when it began;
• Franchise stability and market confidence are increasingly critical components of credit;
• There’s a greater focus on capital adequacy;
• Government support is now explicit in our ratings for highly systemically important U.S. banks;
• Hybrid securities appear to be riskier than we thought;
• The industry structure is changing;
• Volatility appears to be here to stay;
• The originate-to-distribute model is being rethought; and
• Regulation is generally increasing.

As I’ve been saying for months, this isn’t so much a banking crisis as it is a consumer crisis.  The banks are dependent on the consumer to increase their borrowing and pad those bank balance sheets with their ever reliable debt payments.  Unfortunately, the likelihood of that occurring does not appear very high at this juncture.