Over the past sixteen months or so, since September 2008, people and businesses have moved a great deal of their wealth into very short-term assets. This continued into January 2010, but the pace has tapered off.
In September 2009, currency in the hands of the public was more than 10% higher than it was one year earlier. Demand deposits at domestically chartered commercial banks were almost 20% larger than in the same month in 2008, and other checkable deposits at commercial banks and thrift institutions were about 16% higher. Movements into these accounts represented the flight to liquidity in the United States economy that accompanied the financial crisis.
Funds also flowed into savings accounts as well: these accounts rose by 14.5%. However, small-denomination time deposits dropped by about 5% during this time and retail money funds fell by almost 16%.
There was also a shift in funds from all thrift institutions except credit unions into commercial banks over this time period.
The move into more liquid accounts continued into January 2010, but at a slower pace than was seen early last fall. For example, NOW accounts and ATS balances at both commercial banks and thrift institutions rose by 20% in the year ending this January.
Also, savings deposits at commercial banks and thrift institutions continued to rise: they rose by more than 15% from January 2009 to January 2010. (Note that currency in circulation increased over this time period at a more normal 4% annual rate and demand deposits at commercial banks rose only by 1.6%.)
However, the withdrawal of funds from small-denomination time deposits and from retail money funds accelerated. The former deposits dropped at a 21% rate over the twelve months ending in January while the latter fell by almost 27%.
Again, the evidence pointed to a shift in deposits from thrift institutions to commercial banks. Overall, at thrift institutions all checkable deposits and time and savings accounts rose by only 1.7% in the year ending January 2010. Taking credit unions out of this total and you get an actual decline at all other thrift institutions. At commercial banks, the total of these accounts rose in excess of 9%.
This shift in funds has had a very dramatic impact on the two narrow measures of the money stock. In January 2010, the year-over-year rate of growth of the narrow, M1, measure of the money stock rose by 6.5%: the year-over-year rate of growth of the broader, M2, measure of the money stock increased by just 1.9%.
These rates of growth are substantially less than they were in the middle of 2009, when the growth rate of the M1 measure was in excess of 17% and in the M2 measure was around 9%. These numbers were, of course, not generated by the actions of the Federal Reserve but by the movement of assets in the economy as the economy de-leveraged and moved into more liquid assets.
The fact that these rates of increase were not driven by the Federal Reserve can be shown in the January figures. The rates of increase in the M1 money stock (6.5%) and in the M2 money stock (1.9%), bear no relation to the injection of reserves into the banking system that has taken place since September 2008.
If we look at the year-over-year rates of growth for January 2010, we observe that total reserves in the banking system rose by over 29% and that the monetary base increased by almost 17%. Obviously, the reserves that have been forced into the banking system have not found their way into loans and thereby into deposits. This, of course, is why the excess reserves of the banking system remain so high, reaching a new average high of $1.119 trillion in the two banking weeks ending February 10, 2010.
The behavior of the banks is confirmed in the numbers produced by the Federal Reserve on the commercial banks. The banking industry continues to shrink in terms of asset size and the amount of bank loans, every kind of bank loan, is dropping. The commercial banking industry, on net, is just not lending. See http://seekingalpha.com/article/188566-the-banking-system-continues-to-shrink and http://seekingalpha.com/article/188074-problem-loans-still-weighing-on-small-and-medium-sized-banks.
Historically, a 2% growth rate for the M2 measure of the money stock is incapable of producing economic growth. In fact, to sustain this number would imply a deflationary economy.
However, there are two contradictory things going on here. First, as mentioned above, the growth rate in BOTH measures of the money stock over the past year or so has been generated by people and businesses de-leveraging, becoming more liquid, and moving existing assets around. This is the deflationary scenario.
The growth rates in BOTH measures of the money stock have not been achieved through Federal Reserve actions. The reason is, of course, that the banks aren’t lending! If the banks continue to stay on the sidelines, money stock growth will continue to be anemic…at best!
Second, the inflationary scenario, the Fed has injected over $1.1 trillion of excess reserves into the banking system. A major concern is whether or not the Fed can unwind this injection without having repercussions on bank lending, money stock growth, and inflation. We can only hope that the Fed is successful in its “undoing.” See http://seekingalpha.com/article/187292-tightening-at-the-fed-get-ready-for-the-undoing.
We need to keep an eye on these figures because it is going to be important to observe how people are allocating their assets and how they are spending their money. Couple this with information on lending in the banking system and we should get some idea of the health of small- and medium-sized business, the hoped-for foundation of an economic recovery.
Showing posts with label bank assets. Show all posts
Showing posts with label bank assets. Show all posts
Monday, February 15, 2010
Sunday, January 10, 2010
Smaller Banks Continue to Struggle
Smaller banks continued to struggle, balance sheet-wise, in the fourth quarter of 2009. Data have just been released bringing us through the last banking week of the year, December 30, 2009.
These data come from the H.8 release of the Federal Reserve System and are seasonally adjusted. Although there are some inconsistencies in the data series over time, this is the best comprehensive view we have of the banking system and can give us some idea of what is happening to banks if examined on a regular basis.
Large domestically chartered banks are the largest 25 domestically chartered banks in the United States and possessed about $6.7 trillion in assets on December 30, 2009. Small banks are the banks not included in the largest 25 and possessed about $3.6 trillion in assets on the same date. This difference in size gives you some indication of the relative importance, based on asset-size, of the two categories of banks. And, there are over 8 thousand FDIC insured banks in the United States.
Large banks, as we have heard, are going to report record or near record-level results for the calendar year 2009 and bonuses are expected to approach the levels reached in the peak year of 2007.
There is some indication that the interest-earning assets of large banks are starting to grow again. Over the past 13-week period securities held by these banks increased by about $87 billion and Loans and Leases rose by around $106 billion. Surprisingly, most of the increases in loans came in residential home loans and commercial real estates mortgages, $83 billion and $20 billion, respectively. Commercial and Industrial loans continued to decline over this period, dropping by about $27 billion.
We see similar behavior over the past 4-week period as the securities portfolio rose by about $21 billion and Residential and Commercial loans increased by a combined $12 billion. Business loans dropped this time period by about $7 billion.
Very little money, if any, is going into the business sector.
The improvement in the position of the larger banks has allowed them to reduce their holdings of cash assets by $172 billion over the past 13 weeks, by $26 billion in the last 4 weeks.
On the other hand, small banks really seem to be struggling. Profit-wise, the news is not good for this sector.
Their balance sheet performance is not all that good, either. Over the past 4-week period, the smaller banks have lost $36 billion in assets and have lost a total of $108 billion in assets over the past 13-weelk period.
All of this reduction has come in earning assets other than securities. Over the whole 13 week period the smaller banks have kept their securities portfolio roughly constant. Hence, the reduction in assets has been centered on their loan portfolios.
The biggest drop: commercial real estate mortgages. The smaller banks have seen their holdings of commercial mortgages drop by around $50 billion over the past 13 weeks; the drop has been slightly less than $20 billion for the last 4 weeks.
We have heard over and over again about the problems in commercial real estate and what a serious problem this is for the small- and medium-sized banks in this country. We have seen a decline of more than 10% in portfolio assets in this category over the past 12 months. The forecasts are for an additional decline by at least this amount over the next 12 to 18 months.
This is not a good picture.
The residential mortgage portfolio also continues to decline. We see another $8 billion reduction in this number over the last 13 weeks, the majority of the fall coming in the last four weeks.
The thing to watch here is that as unemployment stays high, as people continue to leave the workforce, and as businesses go more and more to hiring temporary help, the residential mortgage sector is expected to remain on the weak side. Almost everyone seems to predicting more foreclosures and more bankruptcies and the brunt of these difficulties is expected to fall on the small- to medium-sized banks.
Remember that at the end of the third quarter the FDIC had 552 banks, mostly smaller ones, on its list of problem banks. This number is expected to grow this year, even accounting for the number of banks that will actually fail. People are saying that about one-third of this total will fail which will be that 3 to 3.5 banks will fail every week for the next 12 to 18 months.
Are there any good signs or is everything bad?
Well, the big banks seem to be in great shape and are off to the races!
The small- and medium-sized banks seem to be in for some very rough times.
The gap widens further and further between Wall Street and Main Street!
And, as we have said before, thrift institutions seem to be in the same boat as the small- and medium-sized banks.
Today, it seems as if, if you want to be small, you should be a credit union!
Just one comment on regulatory reform: it seems to me that a part of regulatory reform needs to be a total restructuring of the financial services industry. The mumbo-jumbo we have right now is just a residual from the past and bears no rational relationship to anything that makes sense.
Thrift institutions were, at one time, the only financial institutions dedicated to the housing industry. At one time they were useful. They seem totally superfluous at the present time.
Others, particularly in Great Britain, seem intent upon a restructuring that would separate the deposit banking function of financial institutions from the deal making/trading function of financial institutions.
Perhaps before we spend a lot of time developing a regulatory structure of new bandages and splints for the old system, people should put in some serious time thinking about what financial institutions are needed and how functions should be allocated across institutions.
These data come from the H.8 release of the Federal Reserve System and are seasonally adjusted. Although there are some inconsistencies in the data series over time, this is the best comprehensive view we have of the banking system and can give us some idea of what is happening to banks if examined on a regular basis.
Large domestically chartered banks are the largest 25 domestically chartered banks in the United States and possessed about $6.7 trillion in assets on December 30, 2009. Small banks are the banks not included in the largest 25 and possessed about $3.6 trillion in assets on the same date. This difference in size gives you some indication of the relative importance, based on asset-size, of the two categories of banks. And, there are over 8 thousand FDIC insured banks in the United States.
Large banks, as we have heard, are going to report record or near record-level results for the calendar year 2009 and bonuses are expected to approach the levels reached in the peak year of 2007.
There is some indication that the interest-earning assets of large banks are starting to grow again. Over the past 13-week period securities held by these banks increased by about $87 billion and Loans and Leases rose by around $106 billion. Surprisingly, most of the increases in loans came in residential home loans and commercial real estates mortgages, $83 billion and $20 billion, respectively. Commercial and Industrial loans continued to decline over this period, dropping by about $27 billion.
We see similar behavior over the past 4-week period as the securities portfolio rose by about $21 billion and Residential and Commercial loans increased by a combined $12 billion. Business loans dropped this time period by about $7 billion.
Very little money, if any, is going into the business sector.
The improvement in the position of the larger banks has allowed them to reduce their holdings of cash assets by $172 billion over the past 13 weeks, by $26 billion in the last 4 weeks.
On the other hand, small banks really seem to be struggling. Profit-wise, the news is not good for this sector.
Their balance sheet performance is not all that good, either. Over the past 4-week period, the smaller banks have lost $36 billion in assets and have lost a total of $108 billion in assets over the past 13-weelk period.
All of this reduction has come in earning assets other than securities. Over the whole 13 week period the smaller banks have kept their securities portfolio roughly constant. Hence, the reduction in assets has been centered on their loan portfolios.
The biggest drop: commercial real estate mortgages. The smaller banks have seen their holdings of commercial mortgages drop by around $50 billion over the past 13 weeks; the drop has been slightly less than $20 billion for the last 4 weeks.
We have heard over and over again about the problems in commercial real estate and what a serious problem this is for the small- and medium-sized banks in this country. We have seen a decline of more than 10% in portfolio assets in this category over the past 12 months. The forecasts are for an additional decline by at least this amount over the next 12 to 18 months.
This is not a good picture.
The residential mortgage portfolio also continues to decline. We see another $8 billion reduction in this number over the last 13 weeks, the majority of the fall coming in the last four weeks.
The thing to watch here is that as unemployment stays high, as people continue to leave the workforce, and as businesses go more and more to hiring temporary help, the residential mortgage sector is expected to remain on the weak side. Almost everyone seems to predicting more foreclosures and more bankruptcies and the brunt of these difficulties is expected to fall on the small- to medium-sized banks.
Remember that at the end of the third quarter the FDIC had 552 banks, mostly smaller ones, on its list of problem banks. This number is expected to grow this year, even accounting for the number of banks that will actually fail. People are saying that about one-third of this total will fail which will be that 3 to 3.5 banks will fail every week for the next 12 to 18 months.
Are there any good signs or is everything bad?
Well, the big banks seem to be in great shape and are off to the races!
The small- and medium-sized banks seem to be in for some very rough times.
The gap widens further and further between Wall Street and Main Street!
And, as we have said before, thrift institutions seem to be in the same boat as the small- and medium-sized banks.
Today, it seems as if, if you want to be small, you should be a credit union!
Just one comment on regulatory reform: it seems to me that a part of regulatory reform needs to be a total restructuring of the financial services industry. The mumbo-jumbo we have right now is just a residual from the past and bears no rational relationship to anything that makes sense.
Thrift institutions were, at one time, the only financial institutions dedicated to the housing industry. At one time they were useful. They seem totally superfluous at the present time.
Others, particularly in Great Britain, seem intent upon a restructuring that would separate the deposit banking function of financial institutions from the deal making/trading function of financial institutions.
Perhaps before we spend a lot of time developing a regulatory structure of new bandages and splints for the old system, people should put in some serious time thinking about what financial institutions are needed and how functions should be allocated across institutions.
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