The Office of Thrift Supervision (OTS) released statistics on the state of the thrift industry for the second quarter of 2010 on August 25. The industry is limping along, but the signs of a disappearing industry are all over the report.
The cloud over the whole industry is that the OTS will be merged into the Office of the Comptroller of the Currency (OCC) in the upcoming year. (See my post “So Long to the Savings and Loan Industry”, http://seekingalpha.com/article/214460-so-long-to-the-savings-and-loan-industry.) This, of course, is impacting decisions and affecting performance.
Two major figures stand out.
First, industry assets decreased by 15 percent from the second quarter of 2009 to the second quarter of 2010 to $931 billion from $1.1 trillion. From the second quarter of 2008 to the second quarter of 2009, industry assets fell by 27 percent from $1.51 trillion to $1.1 trillion.
Second, the number of supervised institutions declined from 792 thrifts at the end of the second quarter of 2009 to 753 at the end of the second quarter of 2010, just about a 5 percent decline. Yes, there have been thrift failures, but there has also been the constant drop in the number of thrift institutions in existence due to thrift conversions into commercial banks. This latter trend is expected to accelerate as the merger with the OCC proceeds.
One other interesting structural fact concerning the thrift industry I would like to mention. Of the 753 thrift institutions that exist, 402 of these thrifts are owned by 441 thrift holding company enterprises. These 402 thrifts have assets totaling $714 billion which represents 77 percent of all thrift assets. But, one should also note that these thrift holding companies control approximately $4.1 trillion in United States domiciled consolidated assets.
Note that at the end of the second quarter of 2009, there were 459 thrift holding companies supervised by the OTS and these institutions control $5.5 trillion in U. S. domiciled consolidated assets. The decline from this figure to the second quarter 2010 figure is over 25 percent.
Just in comparison, according to the National Credit Union Association, there are close to 7,500 credit unions in the United States, down about 250 from the same time in 2009. However, assets at these credit unions totaled almost $900 billion at the end of the first quarter of 2010, up just about 5 percent from the end of the same quarter in 2009. Total shares and deposits at credit unions rose by 6.7 percent, year-over-year, to a little over $773 billion. The credit union industry continues to grow and in many areas of the country, Philadelphia for one, major expanded credit unions are becoming a force in the local banking markets.
Overall, in the aggregate data released by the Federal Reserve, deposits at all thrift institutions, including credit unions, rose by 0.5 percent from July 2009 to July 2010. The conclusion one can draw for these numbers is that funds are leaving the OTS regulated thrift institutions to go to commercial banks and credit unions.
It is going to be very interesting to watch the credit union sector over the next several years. The interesting question here is whether or not the larger, expanding credit unions can pick up the consumer funds that are leaving savings and loans, savings banks, and commercial banks. Could the banking industry bifurcate into primarily “business” banks and “consumer” banks?
Given all the other factors that are impacting depository institutions one can safely say that the whole landscape of banking and finance is going to change dramatically over the next five to ten years.
Showing posts with label Office of Thrift Supervision. Show all posts
Showing posts with label Office of Thrift Supervision. Show all posts
Friday, August 27, 2010
Tuesday, August 24, 2010
Where is Banking Headed? Not Up!
The biggest problem in the economy, I believe, is the banking system. The government recognizes this and that is why the various agencies within the government are following such bizarre policies. The Federal Reserve has kept its target interest rate below 20 basis points for over twenty months now and it appears as if it will maintain this target for at least six to twelve more months. The FDIC, as of March 31, 2010, had 775 banks on its list of problem banks and Elizabeth Warren claims that at least 3,000 banks are facing severe problems relative to commercial real estate loans. The United States Treasury Department is tip-toeing around banking issues and especially around the government agencies called Fannie Mae and Freddie Mac.
I sure would NOT want to be a bank regulator now. The workloads must be enormous and the pressure must never ease. And, in my view, this situation is not going to change for another three years or so.
For one, the industry is bifurcating. The big institutions are winning. The smaller institutions are going down the drain. One figure I am fond of quoting is that the largest 25 commercial banks in the United States control two-thirds of the assets in the industry. (This is from Federal Reserve statistics.) On March 31, 2010 there were 6,772 commercial banks in the industry (according to the FDIC) so that about 6,750 banks control only one-third of the assets in the industry.
Note this, however. On December 31, 2002 there were 7,888 commercial banks in the United States and on December 31, 1992 there were 11,463. So the number of banks in the US declined by more than 40% in the past 18 years.
But, commercial banks with more than $1.0 billion in assets increased from 380 at the 1992 date to 405 at the 2002 date to 523 this year.
Banks that had less than $100 million in assets fell dramatically during this time period: in 1992 there were 8,292 banks; in 2002 there were 4,168; and in 2010 there were 2,469.
Banks between $100 million and $1.0 billion in asset size rose from 2,791 in 1992 to 3,315 in 2002 and to 3,780 in 2010.
However, check this out. In terms of full time equivalent employees, banks with less than $100 million in assets averaged 24 employees in 1992, 20 employees in 2002, and 17 employees in 2010. The middle size of banks averaged 121 employees in 1992, 90 employees in 2002, and 72 employees in 2010.
It appears as if the part of the banking system that controls less than one-third of the banking assets in the United States has gotten smaller and smaller in terms of size of institution and employment. Yet, during the last fifty years, the people in these institutions have been asked to do more and more in terms of the environment they are working within and the pressures they feel. Banks, throughout this time period, have not been able to just live off the interest rate spread they earn between loans and deposits.
Furthermore, the thrift industry has also shrunk. The Savings and Loan industry is dead! (http://seekingalpha.com/article/214460-so-long-to-the-savings-and-loan-industry) The numbers support this demise. On December 31, 1992 there were 2,390 savings institutions in the United States. This number dropped to 1,466 at the end of 2002 and fell to 1,160 at the end of March 2010. The Office of Thrift Supervision (which was a part of the Treasury Department) is to merge into the Office of the Comptroller of the Currency (which is a bureau of the Treasury). Thrift institutions will become more and more like commercial banks and the idea of the thrift industry will fade into memory. Most of these are very small institutions, not unlike the smaller commercial banks listed above with very few employees.
I go through this list because many of the problems that now exist within the banking system are concentrated in these smaller institutions, formerly the heart-beat of Main Street America. In the last fifty years the financial environment changed substantially and a large number of these depository institutions were just not able to make the transition. We are going through the final stages of the current restructuring of the banking industry. What we will see in the next five to seven years will be difficult to compare with what existed in the last half of the twentieth century.
What changed? Well, the inflation of the 1960s and 1970s brought about higher and higher short term interest rates. For many institutions, the comfortable interest rate spreads the banks and thrifts worked with disappeared and even went negative in some instances. The government’s response was to open up the balance sheets and allow these institutions to diversify and create more services that could earn fee income. Also, new financial instruments were created to allow these depository institutions to get into more exotic types of investments.
A typical situation was one in which a depository institution had only 15 people or less with most of them being tellers or clerks and only two or possibly three that had executive authority. Most of these employees had been with the institutions for a decade or more. These institutions were flooded with investment bankers and others with all kinds of sophisticated ideas about how a $50 million organization could get into high-yielding assets or buy cheap deposits or do many other very innovative things so as to regain profitability. The late 1970s and 1980s are full of stories about how the managements of small institutions were “educated” in the ways of Wall Street. The thrift crisis resulted.
In the 1990s and 2000s even more sophisticated instruments and opportunities were brought to the smaller institutions that thought they were getting good advice to help them operate in the twenty-first century. Part of what the managements got into was commercial real estate deals. This is what Elizabeth Warren has alerted us to. But, there are many, many other institutions that have securities or other assets on their balance sheets that are not performing or are damaged in one way or another.
What is Ms. Warren talking about when it comes to the magnitude of the problem? Is she talking about a 20% write down of some assets? A 25% write down? Do these “small” banks have sufficient capital to take such a write down? Can these small banks raise sufficient new capital to cover such a write down?
Can the banking industry handle another 40% decline in the number of banks in the system? Can the banking industry absorb this contraction in the next three to five years not in 18 years? This would mean a loss of more than three thousand commercial banks and savings institutions in this time period.
This is the environment that the Fed, the FDIC, and the Treasury Department is currently working within. They have not really let us know how serious the problem is. Elizabeth Warren has perhaps given us more information than others within the government would like us to have. Maybe this straight talking is why many people are reluctant to put her in charge of a government agency. She might tell us what is really going on.
Whatever, it just looks as if the banking system has a long way to go in order to regain its health.
I sure would NOT want to be a bank regulator now. The workloads must be enormous and the pressure must never ease. And, in my view, this situation is not going to change for another three years or so.
For one, the industry is bifurcating. The big institutions are winning. The smaller institutions are going down the drain. One figure I am fond of quoting is that the largest 25 commercial banks in the United States control two-thirds of the assets in the industry. (This is from Federal Reserve statistics.) On March 31, 2010 there were 6,772 commercial banks in the industry (according to the FDIC) so that about 6,750 banks control only one-third of the assets in the industry.
Note this, however. On December 31, 2002 there were 7,888 commercial banks in the United States and on December 31, 1992 there were 11,463. So the number of banks in the US declined by more than 40% in the past 18 years.
But, commercial banks with more than $1.0 billion in assets increased from 380 at the 1992 date to 405 at the 2002 date to 523 this year.
Banks that had less than $100 million in assets fell dramatically during this time period: in 1992 there were 8,292 banks; in 2002 there were 4,168; and in 2010 there were 2,469.
Banks between $100 million and $1.0 billion in asset size rose from 2,791 in 1992 to 3,315 in 2002 and to 3,780 in 2010.
However, check this out. In terms of full time equivalent employees, banks with less than $100 million in assets averaged 24 employees in 1992, 20 employees in 2002, and 17 employees in 2010. The middle size of banks averaged 121 employees in 1992, 90 employees in 2002, and 72 employees in 2010.
It appears as if the part of the banking system that controls less than one-third of the banking assets in the United States has gotten smaller and smaller in terms of size of institution and employment. Yet, during the last fifty years, the people in these institutions have been asked to do more and more in terms of the environment they are working within and the pressures they feel. Banks, throughout this time period, have not been able to just live off the interest rate spread they earn between loans and deposits.
Furthermore, the thrift industry has also shrunk. The Savings and Loan industry is dead! (http://seekingalpha.com/article/214460-so-long-to-the-savings-and-loan-industry) The numbers support this demise. On December 31, 1992 there were 2,390 savings institutions in the United States. This number dropped to 1,466 at the end of 2002 and fell to 1,160 at the end of March 2010. The Office of Thrift Supervision (which was a part of the Treasury Department) is to merge into the Office of the Comptroller of the Currency (which is a bureau of the Treasury). Thrift institutions will become more and more like commercial banks and the idea of the thrift industry will fade into memory. Most of these are very small institutions, not unlike the smaller commercial banks listed above with very few employees.
I go through this list because many of the problems that now exist within the banking system are concentrated in these smaller institutions, formerly the heart-beat of Main Street America. In the last fifty years the financial environment changed substantially and a large number of these depository institutions were just not able to make the transition. We are going through the final stages of the current restructuring of the banking industry. What we will see in the next five to seven years will be difficult to compare with what existed in the last half of the twentieth century.
What changed? Well, the inflation of the 1960s and 1970s brought about higher and higher short term interest rates. For many institutions, the comfortable interest rate spreads the banks and thrifts worked with disappeared and even went negative in some instances. The government’s response was to open up the balance sheets and allow these institutions to diversify and create more services that could earn fee income. Also, new financial instruments were created to allow these depository institutions to get into more exotic types of investments.
A typical situation was one in which a depository institution had only 15 people or less with most of them being tellers or clerks and only two or possibly three that had executive authority. Most of these employees had been with the institutions for a decade or more. These institutions were flooded with investment bankers and others with all kinds of sophisticated ideas about how a $50 million organization could get into high-yielding assets or buy cheap deposits or do many other very innovative things so as to regain profitability. The late 1970s and 1980s are full of stories about how the managements of small institutions were “educated” in the ways of Wall Street. The thrift crisis resulted.
In the 1990s and 2000s even more sophisticated instruments and opportunities were brought to the smaller institutions that thought they were getting good advice to help them operate in the twenty-first century. Part of what the managements got into was commercial real estate deals. This is what Elizabeth Warren has alerted us to. But, there are many, many other institutions that have securities or other assets on their balance sheets that are not performing or are damaged in one way or another.
What is Ms. Warren talking about when it comes to the magnitude of the problem? Is she talking about a 20% write down of some assets? A 25% write down? Do these “small” banks have sufficient capital to take such a write down? Can these small banks raise sufficient new capital to cover such a write down?
Can the banking industry handle another 40% decline in the number of banks in the system? Can the banking industry absorb this contraction in the next three to five years not in 18 years? This would mean a loss of more than three thousand commercial banks and savings institutions in this time period.
This is the environment that the Fed, the FDIC, and the Treasury Department is currently working within. They have not really let us know how serious the problem is. Elizabeth Warren has perhaps given us more information than others within the government would like us to have. Maybe this straight talking is why many people are reluctant to put her in charge of a government agency. She might tell us what is really going on.
Whatever, it just looks as if the banking system has a long way to go in order to regain its health.
Tuesday, July 13, 2010
So Long to the Savings and Loan Association
Well, the final nail is being hammered into the coffin. The Savings and Loan industry is going to be “legacy”…and, rightfully so.
The New York Times writes the obituary: “Financial Bill to Close Regulator of Fading Industry,” http://www.nytimes.com/2010/07/14/business/14thrift.html?_r=1&hp. “The most remarkable piece of the financial regulation bill that Democrats hope to send the president this week is the directive to dismember and close the Office of Thrift Supervision. The decision is all the more remarkable because it cuts against the grain of a bill devoted to expanding federal regulation, and because it has had virtually no opposition, save for the obligatory protests of the agency’s senior management.”
The original Savings and Loan Association was created to help Americans own their own homes. The S&Ls deposits were time and savings accounts, no transaction accounts, and the assets of an association were mortgages. An S&L could hold 80% of its assets of more in mortgages…not mortgage-backed securities or any other type of synthetic concoction of mortgage instruments or derivatives. These were the single family mortgages of individual families, most of them known personally by the people who ran the association.
Furthermore, these financial organizations were mutual institutions. That is, they were owned by their depositors. No stock holders, no maximizing shareholder value, no gimmicks, no nothing. By law they took time and savings deposits and, by law, they originated mortgages to hold on their balance sheets.
How did they make money? Well, for much of their history they paid 1 ½% to 2% interest on their deposits and collected 4% or so on their mortgages. Their expenses were extremely low. In a typical institution there were only one or possibly two managers (men) and a clerk and maybe two or three tellers or a receptionist (all women). They were mutual institutions so that they did not have to earn anything like 15% on paid-in equity. A 1% return on assets was really good and it just went into the surplus account anyway. Remember George Bailey (Jimmy Stewart), the Bailey Building and Loan Association and the movie “It’s A Wonderful Life.”
The demise of the industry is just another example of how much inflation can be the “stealth” destroyer of stability. The health of the industry was dependent upon the interest rate spread presented above. And, in non-inflationary times when interest rates remained relatively stable, the S&Ls could prosper because the interest rate spread they earned paid for expenses and added to the association’s surplus.
There were cyclical problems, but regulators, specifically using Regulation Q (Reg Q), put a lid on the rate that these institutions could pay depositors so that a positive interest rate spread could be maintained although this “lid” caused something called “dis-intermediation”, an outflow of deposits, that put pressure on the liquidity of associations. This disintermediation was just a time period these institutions had to go through until interest rates stabilized once again.
However, this disintermediation problem points up the underlying weakness of the Savings and Loan Industry. The industry was built on the foundation of interest rate risk: the assets of the typical Savings and Loan Association had an effective average maturity of twelve or thirteen years. The deposits had a maturity of…well, they were very short term deposits.
The periodic problem of disintermediation pointed up the underlying risk that existed within the industry. However, the inflation of the 1960s basically killed the industry. As inflation rose toward the end of the decade, interest rates rose as inflationary expectations got built into the term structure. That is, interest rates, both long-term and short-term, rose.
Well, the typical S&L saw the cost of deposits rise by a substantial amount almost across the board while the return they earned on their assets rose only modestly. All of a sudden, thrift institutions were faced with negative interest rates spreads and they could not exist in such an environment.
This is when deregulation started and accelerated dramatically through the 1970s. Basically, the idea of a thrift institution was dead by then. Not only did regulators allow balance sheets to become more like commercial banks, bank executives were drawn into the industry to run the thrifts. And, of course, thrift institutions were allowed to shed their “mutual” charter and become stock institutions. I took one thrift institution public in 1985 and ran another thrift that had just gone public in 1987.
I have spent a lot of time over the past two years writing about how inflation in the United States over the past 50 years or so basically undermined the financial system as it was known, created a tremendous environment for financial innovation, and helped to change the makeup of American society, where employment in financial services reached 40% or more of the workforce when, before 1980, employment in financial services had never exceeded 15% of the workforce.
The inflation created by the federal government since January 1961 forced the collapse of the post-World War II international financial system as the United States took itself off the gold standard on August 15, 1971 and floated the United States dollar. The inflation of the 1960s resulted in the rise in interest rates that destroyed the foundation of the thrift industry in the United States and created the conditions that led to the Savings and Loan crisis of the late 1980s and early 1990s. The continued inflation of the late 20th century led to the stock market bubble in the 1990s (the dot.com boom), the demise of the Glass-Steagall Act, and the asset bubble (both in the stock market and housing) of the 2000s.
The difficulties we have been experiencing in the last few years can also be traced back to the inflation of the past fifty years. Yet, inflation is sneaky and people tend to forget it in pointing their fingers at the “bastards” that “caused” the financial collapse.
The economist Irving Fisher captured this situation in his book titled “Inflation”: “If it is inflation and the one who profits is the business man, the workman calls the profiter a ‘profiteer.’ The underdog reasons as follows: ‘How did I get poor while you got rich? You did it, you dirty thief. I don’t know just how you did it; your ways are too subtle, sinister, dark and underground for simple me; but you did it all the same’
But, none of us—neither the farmer, nor the workman, nor the bondholder, nor the stockholder—thinks of blaming the dollar. So the real culprit stands on the curbstone watching us poor mortals as we beat out each other’s brains, and has the last laugh.” (This was written in 1933.)
So, good-bye to the Savings and Loan Industry. You did America well. But, your time is past. Rest In Peace (RIP).
The New York Times writes the obituary: “Financial Bill to Close Regulator of Fading Industry,” http://www.nytimes.com/2010/07/14/business/14thrift.html?_r=1&hp. “The most remarkable piece of the financial regulation bill that Democrats hope to send the president this week is the directive to dismember and close the Office of Thrift Supervision. The decision is all the more remarkable because it cuts against the grain of a bill devoted to expanding federal regulation, and because it has had virtually no opposition, save for the obligatory protests of the agency’s senior management.”
The original Savings and Loan Association was created to help Americans own their own homes. The S&Ls deposits were time and savings accounts, no transaction accounts, and the assets of an association were mortgages. An S&L could hold 80% of its assets of more in mortgages…not mortgage-backed securities or any other type of synthetic concoction of mortgage instruments or derivatives. These were the single family mortgages of individual families, most of them known personally by the people who ran the association.
Furthermore, these financial organizations were mutual institutions. That is, they were owned by their depositors. No stock holders, no maximizing shareholder value, no gimmicks, no nothing. By law they took time and savings deposits and, by law, they originated mortgages to hold on their balance sheets.
How did they make money? Well, for much of their history they paid 1 ½% to 2% interest on their deposits and collected 4% or so on their mortgages. Their expenses were extremely low. In a typical institution there were only one or possibly two managers (men) and a clerk and maybe two or three tellers or a receptionist (all women). They were mutual institutions so that they did not have to earn anything like 15% on paid-in equity. A 1% return on assets was really good and it just went into the surplus account anyway. Remember George Bailey (Jimmy Stewart), the Bailey Building and Loan Association and the movie “It’s A Wonderful Life.”
The demise of the industry is just another example of how much inflation can be the “stealth” destroyer of stability. The health of the industry was dependent upon the interest rate spread presented above. And, in non-inflationary times when interest rates remained relatively stable, the S&Ls could prosper because the interest rate spread they earned paid for expenses and added to the association’s surplus.
There were cyclical problems, but regulators, specifically using Regulation Q (Reg Q), put a lid on the rate that these institutions could pay depositors so that a positive interest rate spread could be maintained although this “lid” caused something called “dis-intermediation”, an outflow of deposits, that put pressure on the liquidity of associations. This disintermediation was just a time period these institutions had to go through until interest rates stabilized once again.
However, this disintermediation problem points up the underlying weakness of the Savings and Loan Industry. The industry was built on the foundation of interest rate risk: the assets of the typical Savings and Loan Association had an effective average maturity of twelve or thirteen years. The deposits had a maturity of…well, they were very short term deposits.
The periodic problem of disintermediation pointed up the underlying risk that existed within the industry. However, the inflation of the 1960s basically killed the industry. As inflation rose toward the end of the decade, interest rates rose as inflationary expectations got built into the term structure. That is, interest rates, both long-term and short-term, rose.
Well, the typical S&L saw the cost of deposits rise by a substantial amount almost across the board while the return they earned on their assets rose only modestly. All of a sudden, thrift institutions were faced with negative interest rates spreads and they could not exist in such an environment.
This is when deregulation started and accelerated dramatically through the 1970s. Basically, the idea of a thrift institution was dead by then. Not only did regulators allow balance sheets to become more like commercial banks, bank executives were drawn into the industry to run the thrifts. And, of course, thrift institutions were allowed to shed their “mutual” charter and become stock institutions. I took one thrift institution public in 1985 and ran another thrift that had just gone public in 1987.
I have spent a lot of time over the past two years writing about how inflation in the United States over the past 50 years or so basically undermined the financial system as it was known, created a tremendous environment for financial innovation, and helped to change the makeup of American society, where employment in financial services reached 40% or more of the workforce when, before 1980, employment in financial services had never exceeded 15% of the workforce.
The inflation created by the federal government since January 1961 forced the collapse of the post-World War II international financial system as the United States took itself off the gold standard on August 15, 1971 and floated the United States dollar. The inflation of the 1960s resulted in the rise in interest rates that destroyed the foundation of the thrift industry in the United States and created the conditions that led to the Savings and Loan crisis of the late 1980s and early 1990s. The continued inflation of the late 20th century led to the stock market bubble in the 1990s (the dot.com boom), the demise of the Glass-Steagall Act, and the asset bubble (both in the stock market and housing) of the 2000s.
The difficulties we have been experiencing in the last few years can also be traced back to the inflation of the past fifty years. Yet, inflation is sneaky and people tend to forget it in pointing their fingers at the “bastards” that “caused” the financial collapse.
The economist Irving Fisher captured this situation in his book titled “Inflation”: “If it is inflation and the one who profits is the business man, the workman calls the profiter a ‘profiteer.’ The underdog reasons as follows: ‘How did I get poor while you got rich? You did it, you dirty thief. I don’t know just how you did it; your ways are too subtle, sinister, dark and underground for simple me; but you did it all the same’
But, none of us—neither the farmer, nor the workman, nor the bondholder, nor the stockholder—thinks of blaming the dollar. So the real culprit stands on the curbstone watching us poor mortals as we beat out each other’s brains, and has the last laugh.” (This was written in 1933.)
So, good-bye to the Savings and Loan Industry. You did America well. But, your time is past. Rest In Peace (RIP).
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