The most important thing for government regulators at this time is to handle the problems in the banking industry in an orderly fashion. Don’t panic; don’t show fear; just keep plugging ahead.
This seems to be exactly what the FDIC and the Federal Reserve are doing.
The FDIC announced that there are now 829 banks on the problem watch list as of June 30, 2010. Given that 45 banks failed in the second quarter of 2010 this means that 99 additional banks were added to the list. One should note that this figure, 99 banks, compares with 113 banks that were added to the list in the first quarter of 2010. The highest number ever reached for the problem list was 993 and this came in 1993.
Remember, though, that Elizabeth Warren indicated in Congressional testimony that there were 3,000 banks that faced serious problems with respect to loans and assets on their books that probably needed to be written down and that these banks had not seen the full effect of the problems in the commercial real estate sector.
One can also add that these institutions have not really recognized the problems that state and local governments are having in their finances. Note that Pennsylvania’s capital, Harrisburg, announced that it will default on a $3.29 million municipal-bond payment in two weeks making it the second largest general-obligation municipal bond default this year.
With the 32 banks that have failed so far in the third quarter, the total number of failures in the year reached 118, well ahead of the pace from last year when only 140 banks were closed overall.
Using the rule of thumb that one-third of the banks on the problem list will fail over the next 18 months, this would mean that we will experience 276 more bank failures and an average rate of bank failures at 3.5 per week during this time span. In 2010, the pace of bank failures has hovered around this average.
But, the FDIC is working through this tremendous case load in an orderly fashion. There are very few surprises and this is the best thing that can happen given the condition of the banking system.
The Federal Reserve is also contributing to this work out situation in the banking industry. Perhaps the most important thing it is doing is the subsidization of the large banks in the United States. By keeping its target interest rate around zero percent, the Fed is paying a big bonus to the big banks and the payoff for this policy is that the profits at the largest financial institutions have been at record levels and that about 75 percent of the assets of the banking system seem to be well protected.
The profit picture of the banking industry improved in the second quarter with the industry recording the highest level of profits since before the financial crisis. The FDIC reported that nearly two-thirds of United States banks reported a year-over-year improvement. The biggest booster to this performance was the reduction loan-loss provisions.
However, it should be noted that 20 percent of the banks, primarily the smaller banks, reported a net loss and that more than 60 percent of banks, mainly the smaller institutions, continued to increase their loan loss reserves.
Another place where one can find information on the problems the commercial banking industry is having is the report of the Federal Reserve on Enforcement Actions taken by Federal Reserve Banks against some of the financial institutions it regulates.
So far in the third quarter of 2010, the Federal Reserve has engaged in 56 enforcement actions against financial institutions bringing the total up to 192 for the full year to date. Last year only 172 enforcement actions were taken.
Enforcement actions can take one of two forms: a written agreement or a prompt corrective action directive.
The most recent written agreement is a legal action taken by the Federal Reserve Bank of Kansas City, the State of Colorado Division of Banking and First American Bancorp and First American State Bank, both of Greenwood Village, Colorado. This written agreement aims to bring the banks into compliance with every “applicable provision” of the Agreement reached between “the Bancorp, the Bank, and their institution-affiliated parties”, the Reserve Bank and the Division. The agreement specifically deals with Board Oversight, Credit Risk Management, Lending and Credit Administration, Asset Improvement, Internal Audit, Allowance for Loan and Lease Losses, Capital Plan, Earnings Plan and Budget, Liquidity/Funds Management, Dividends and Distributions, Debt and Stock Redemptions, Cash Flow, and, Compliance with Laws and Regulations. The specifics of each of these sections present a very definite list of things the bank(s) must do in order to comply with the agreement. Furthermore, specific dates are given for achieving compliance. And, “The provisions of this Agreement shall not bar, estop, or otherwise prevent the Board of Governors, the Reserve Bank, the Division or any other federal or state agency from taking any other action affecting” the affected parties or this successors and assigns.
The most recent Prompt Corrective Action is that taken against the First Community Bank of Taos, New Mexico. In this agreement very specific actions are required such to “increase the Bank’s equity” and to “enter into and close a contract to be acquired by a depository institutions holding company or combine with another insured depository institution.” The Bank is restricted from making capital distributions or the payment of dividends. The Bank shall not “solicit and accept new deposit accounts, etc.. The Bank shall restrict the payment of bonuses to senior executive officers and increases in compensation of such officers.” And, the bank is restricted in terms of asset growth, acquisitions, branching, and new lines of business.
These enforcement actions are very serious and a reading of some of them can give one an idea of the problems that exist “out there” in the banking industry. And, 192 of these have been given out so far this year!
As more and more information is made available, the more one realizes that the banking industry is being re-constructed. In the next five years or so we will observe a banking industry that is much smaller than the one that exists today and this industry will be even more dominated by the larger institutions making up the industry. I believe that the number of domestically chartered banks in the United States will fall from a present level of about 7,800 banks to around 4,000 banks. I believe that the largest 25 domestically chartered banks in the United States will control about 75 percent of the banking assets in the country up from around 67 percent now.
I am more confident about this latter number than the former one. It is hard to believe that 3,975 banks can profitably be operated when they only control 25 percent of the banking assets. The smaller banks are just not going to be profitable and cannot compete in the world of the 21st century!
Showing posts with label big bank profitability. Show all posts
Showing posts with label big bank profitability. Show all posts
Wednesday, September 1, 2010
Wednesday, June 9, 2010
Federal Reserve Exit Watch: Part 11
The basic monetary facts are these: commercial banks aren’t lending and the money stock measures are not really growing. On the surface, it looks as if we have what Irving Fisher called, in the 1930s, the makings of a debt deflation. This is how we can interpret the statistics from the banking sector.
Contrary evidence comes from the performance of the “big banks”, the largest 25 domestically chartered commercial banks in the United States banking system. They are raking in profits right and left and are “making a killing” from the arbitrage and trading opportunities being subsidized for them by the Federal Reserve System.
The other 8,000 domestically chartered commercial banks in the United States are not doing so well. Roughly one out of every eight of these banks is on or very near the list of problem banks of the Federal Deposit Insurance Corporation. These are the banks that the Federal Reserve is trying to preserve through the low target interest rate policy it is following that is the ‘cash cow’ for the largest banks.
The Federal Reserve got us into this position by following a very destructive monetary policy in the early part of this decade. Then, once the financial system began to collapse, Chairman Ben Bernanke and the Federal Reserve threw everything it had against the wall to see what would stick.
We talk about financial innovation in the private sector! No group, organization, or institution initiated more financial innovation over the past fifty years than did the United States government and the Federal Reserve takes the individual prize for financial innovation during this period for what it did over the last three years or so. But, there was no real sophistication to the Fed’s financial innovation: the task of the Federal Reserve was to throw as much money as it could into the financial markets to protect the ‘liquidity’ of the market and its instruments.
Now the banking system (excuse me, the 8,000 ‘other’ domestically chartered commercial banks) is teetering on the brink of a ‘debt deflation’ (while the 25 large domestically chartered commercial banks are cleaning up) and the Federal Reserve cannot remove whatever ‘stuck’ to the wall from the banking system for fear that the rate of failure of the ‘smaller’ banks will accelerate.
The FDIC is overseeing the closure of approximately four commercial banks a week this year and the feeling is that this rate of failure could rise to five banks a week this summer or next fall. Analysts now expect the Fed will continue its “low interest rate target” into 2011.
Wow! The big banks are going to love this!!!
The ‘other side’ question is how is the Fed going to “get the stuff” that stuck on the wall, off the wall? That is, how is the Fed going to ‘exit’ its stance of excessive ease?
We are still waiting. The only ‘trick’ it has applied so far is to get the United States Treasury to
park funds in something called the “United States Treasury, supplementary financing account.” This account has risen by roughly $200 billion since the first of the year, $175 billion over the past 13 weeks, and this has drained some of the excess reserves from the banking system.
Again, no straight, classical monetary policy: the Fed used gimmicks…whoops, financial innovations…to get us to this point. Looks like we are going to use various gimmicks…whoops, financial innovations…to help get “the stuff” off the wall.
Excess reserves have declined about $80 billion from January, a little over $70 billion in the last 13 weeks, primarily due to the buildup in the Treasury’s supplementary financing account. Excess reserves, however, still are in excess of $1.0 trillion, averaging $1.048 trillion in the banking week ending June 2.
The only thing that the Federal Reserve has continued to do over the past quarter is to continue to increase its holdings of Mortgage-Backed securities. Over the last 13 weeks, the portfolio of Mortgage-Backed securities rose by $87 billion, $16 billion of the increase came over the past 4 weeks.
And, what impact does this seem to be having on the monetary aggregates. Well, the M2 money stock measure is hovering around a 1.6% year-over-year rate of growth. If the expected real rate of growth of the economy is around 3.0% then this monetary growth is certainly deflationary.
But, note this. The rate of growth of the non-M1 part of the M2 money stock measure was only 0.3% in May, on a year-over-year basis. The M1 year-over-year growth rate is 6.8% which shows that people are still transferring their wealth into transactions balances in order to have cash to pay for their daily needs. Given all the unemployment, foreclosures, and bankruptcies, the concern is that this movement will continue putting additional pressure on the 8,000 other domestically chartered commercial banks in the country.
The United States banking system does not seem to be healthy (except for the biggest banks). The monetary system is stalled. Ben Bernanke has traveled to Detroit, Michigan to hold a discussion about getting loans out to small businesses: see his “Brief Remarks at the Meeting on Addressing the Financing Needs of Michigan's Small Businesses, Detroit, Michigan” (http://www.federalreserve.gov/newsevents/speech/bernanke20100603a.htm). The Fed doesn’t seem to understand what is going on.
This is my eleventh post relating to the Federal Reserve’s Exit Strategy. I started these posts 10 months ago because of the concern expressed over how the Fed was going to “get the stuff” off the wall. The Fed wanted to be totally transparent about how it was going to “exit” its position of extreme ease and so it started talking about what it was going to do.
The concern is still there. As far as I can see, there is little confidence that the Fed can safely lead us to the “promised land”, the land of low unemployment, strong economic growth, and little or no inflation.
The Fed has acted with very little subtlety and sophistication over the past decade. Why should we expect it to act any differently over the next ten years, let alone over the next year?
Contrary evidence comes from the performance of the “big banks”, the largest 25 domestically chartered commercial banks in the United States banking system. They are raking in profits right and left and are “making a killing” from the arbitrage and trading opportunities being subsidized for them by the Federal Reserve System.
The other 8,000 domestically chartered commercial banks in the United States are not doing so well. Roughly one out of every eight of these banks is on or very near the list of problem banks of the Federal Deposit Insurance Corporation. These are the banks that the Federal Reserve is trying to preserve through the low target interest rate policy it is following that is the ‘cash cow’ for the largest banks.
The Federal Reserve got us into this position by following a very destructive monetary policy in the early part of this decade. Then, once the financial system began to collapse, Chairman Ben Bernanke and the Federal Reserve threw everything it had against the wall to see what would stick.
We talk about financial innovation in the private sector! No group, organization, or institution initiated more financial innovation over the past fifty years than did the United States government and the Federal Reserve takes the individual prize for financial innovation during this period for what it did over the last three years or so. But, there was no real sophistication to the Fed’s financial innovation: the task of the Federal Reserve was to throw as much money as it could into the financial markets to protect the ‘liquidity’ of the market and its instruments.
Now the banking system (excuse me, the 8,000 ‘other’ domestically chartered commercial banks) is teetering on the brink of a ‘debt deflation’ (while the 25 large domestically chartered commercial banks are cleaning up) and the Federal Reserve cannot remove whatever ‘stuck’ to the wall from the banking system for fear that the rate of failure of the ‘smaller’ banks will accelerate.
The FDIC is overseeing the closure of approximately four commercial banks a week this year and the feeling is that this rate of failure could rise to five banks a week this summer or next fall. Analysts now expect the Fed will continue its “low interest rate target” into 2011.
Wow! The big banks are going to love this!!!
The ‘other side’ question is how is the Fed going to “get the stuff” that stuck on the wall, off the wall? That is, how is the Fed going to ‘exit’ its stance of excessive ease?
We are still waiting. The only ‘trick’ it has applied so far is to get the United States Treasury to
park funds in something called the “United States Treasury, supplementary financing account.” This account has risen by roughly $200 billion since the first of the year, $175 billion over the past 13 weeks, and this has drained some of the excess reserves from the banking system.
Again, no straight, classical monetary policy: the Fed used gimmicks…whoops, financial innovations…to get us to this point. Looks like we are going to use various gimmicks…whoops, financial innovations…to help get “the stuff” off the wall.
Excess reserves have declined about $80 billion from January, a little over $70 billion in the last 13 weeks, primarily due to the buildup in the Treasury’s supplementary financing account. Excess reserves, however, still are in excess of $1.0 trillion, averaging $1.048 trillion in the banking week ending June 2.
The only thing that the Federal Reserve has continued to do over the past quarter is to continue to increase its holdings of Mortgage-Backed securities. Over the last 13 weeks, the portfolio of Mortgage-Backed securities rose by $87 billion, $16 billion of the increase came over the past 4 weeks.
And, what impact does this seem to be having on the monetary aggregates. Well, the M2 money stock measure is hovering around a 1.6% year-over-year rate of growth. If the expected real rate of growth of the economy is around 3.0% then this monetary growth is certainly deflationary.
But, note this. The rate of growth of the non-M1 part of the M2 money stock measure was only 0.3% in May, on a year-over-year basis. The M1 year-over-year growth rate is 6.8% which shows that people are still transferring their wealth into transactions balances in order to have cash to pay for their daily needs. Given all the unemployment, foreclosures, and bankruptcies, the concern is that this movement will continue putting additional pressure on the 8,000 other domestically chartered commercial banks in the country.
The United States banking system does not seem to be healthy (except for the biggest banks). The monetary system is stalled. Ben Bernanke has traveled to Detroit, Michigan to hold a discussion about getting loans out to small businesses: see his “Brief Remarks at the Meeting on Addressing the Financing Needs of Michigan's Small Businesses, Detroit, Michigan” (http://www.federalreserve.gov/newsevents/speech/bernanke20100603a.htm). The Fed doesn’t seem to understand what is going on.
This is my eleventh post relating to the Federal Reserve’s Exit Strategy. I started these posts 10 months ago because of the concern expressed over how the Fed was going to “get the stuff” off the wall. The Fed wanted to be totally transparent about how it was going to “exit” its position of extreme ease and so it started talking about what it was going to do.
The concern is still there. As far as I can see, there is little confidence that the Fed can safely lead us to the “promised land”, the land of low unemployment, strong economic growth, and little or no inflation.
The Fed has acted with very little subtlety and sophistication over the past decade. Why should we expect it to act any differently over the next ten years, let alone over the next year?
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