Business Loans Continue to Increase

The largest twenty-five domestically chartered commercial banks in the United States continue to increase lending to businesses (Commercial and Industrial Loans) over the latest four-week period according to the most recent Federal Reserve data.  Over the latest four-weeks ending November 2, large banks experienced a net increase in business loans by almost $11 billion.  Over the latest 13-week period, these loans have risen by almost $28 billion. 

From October 2010 to October 2011, the largest twenty-five banks have increased their portfolios of these business loans by a little more than $75 billion.

Still, one does not have a lot of confidence that these loans are going into areas that will contribute to the growth of the economy.  Larger companies are still accumulating “cash” to buy back stock or to make acquisitions.  Certainly the cost of borrowing is not a hindrance to these companies obtaining for these purposes these days. 

Commercial and Industrial loans have also increased in the rest of the banking system, but by a little more than one billion dollars over the last four weeks, and by just over $9 billion over the past 13 weeks.  It is not altogether clear what these loans are going for at the present time.  Given that this $9 billion increase is spread through about 6,400 banks, the rise in lending at each bank, on average, is not too great.

The interesting thing about the lending in the smaller 6,400 banks is that residential real estate loans have shown some increase over the past 13-week period.  Residential loans have risen by almost $25 billion over the past quarter, over $13 billion in the last four weeks alone.  The indication is that in some places in the United States, residential lending activity has been picking up.  We will have to watch this number closer in the upcoming weeks and months. 

The softest area in lending still remains the commercial real estate area and the weakness is predominantly in the small- to medium-sized banks.  These loans dropped by slightly less than $14 billion over the past 13-weeks, with more than half the decline at the smaller banks.  Over the past 4-weeks the declines in commercial real estate loans have all been outside the largest 25 banks in the country. 

All domestically chartered commercial banks in the United States reduced their holding of cash balance in the past 13-week period.  The largest 25 commercial banks lowered their balances by $185 billion. The other domestically chartered banks reduced their holdings by only $10 billion.  These decreases in cash balances came despite the fact that excess reserves in the banking system stayed relatively constant during this time period. 

In summary, the latest Federal Reserve statistics indicate that the banking system, as a whole, is becoming less conservative.  Business loans have been picking up for most of the last six months, especially at the largest 25 domestically chartered banks in the United States.  The question mark here, however, is the use that borrowers are putting these funds to.  It does not appear as if the loans are being used for productive purposes that would get the economy moving again. 

The commercial real estate area continues to stay week, especially at small- and medium-sized banks.  Here one still has questions about the quality of these loans on the balance sheets of the smaller banks and the implication of these difficulties for the future.   

One further note: Consumer borrowing at all commercial banks continues to remain weak.  Nothing seems to be happening in this area, which, again, has implications for future economic growth.  The consumer seems to be more interested in getting his/her debt under control than to really engage in more spending.  We will see what happens in this area as the holiday season approaches.

Closing note:  The largest 25 commercial banks in the United States, according to the Federal Reserve data, represented 57 percent of the assets in the banking system on November 2, 2011; foreign-related depository institutions represented 14 percent; and the other (roughly) 6,400 domestically chartered banks represented 29 percent.    

Debt Deflation: Is It a Possibility?

There is still too much debt around.  The fact that there is too much debt around is a result of fifty years of credit inflation and financial innovation that resulted from it. 

The concern now as financial deleveraging takes place is whether or not we will go into a spiral of debt deflation.

The headlines currently are coming out of Europe.  Austerity plans are forthcoming everywhere.  Sovereign debt is the crowning issue…but there is growing concerns over corporate debt. 

And, with the cutback in government spending, the cutback in business spending, and the cutback in personal spending people are getting gloomier and gloomier about a new, European recession.  The clouds seem to be on the horizon.

But, a spillover of a European recession would be another American recession.  The United States depends upon the exports that it sells to Europe.  If Europe goes into a recession then the probability of the United States going into another recession increases. 

The problem is that America still has lots of problems on its own.  Just note some of the issues that have recently been floating around.

For one, corporate bankruptcies still are taking place on a regular basis.  Just recently we have Solyndra going bankrupt which brought attention to the solar industry area as a source of more financial difficulties.  Then we had Syms and its Filene’s Basement go into bankruptcy.  And, then who could forget MF Global.  And, there are many more still on the edge of considering such action…one of them possibly being Kodak.

And, what about the financially tenuous position of state and local governments?  Just Wednesday, Jefferson County, Alabama filed for the largest municipal bankruptcy in United States history.  And, Harrisburg, Pennsylvania was just taken over by the state of Pennsylvania because of its financial problems.  Now we learn that Flint, Michigan is on the verge of insolvency where the state government will takeover there.  And, what about Detroit, Michigan?  Again, the state is about to take over this financially distressed city.  And, there are many more still cities and states still on the edge of financial ruin with underfunded pension funds and so on.

Then we hear that mortgage problem is still not over and that banks are facing further write-downs of the mortgages on their books.   The latest case is that of HSBC which has garnered all sorts of attention over the past few days.   HSBC is still paying for its move into subprime loans earlier.  But, it is also facing a relatively new thing…a customer taking a mortgage payment “holiday.”  Given the political climate financial institutions are finding that people feel that they have very little to lose if they just stop payments on their mortgages.  Banks are finding it very difficult to foreclose on delinquent properties these days and that people fear little retribution if they just quit on any kind of payment to the bank. 

“Customers realized that if they stop paying, there’s very little we (HSBC) oar other banks can do.  This is an emerging trend.” (http://dealbook.nytimes.com/2011/11/09/hsbc-warns-of-economic-challanges-even-as-profit-rises-66/?scp=3&sq=julia%20werdigier&st=Search)

The commercial real estate market is not in very good shape either.  Although commercial real estate is picking up in some areas of the country, a look at the commercial banking data indicates that loans on commercial real estate is the item that is declining the fastest on the balance sheets of commercial banks…especially those that are smaller than the largest 25 in the country. 

Of course, these problems come through when we consider the condition of the banking system.  The commercial banking industry is still not very healthy yet and the prospect of it getting much better through 2012 is not that great.  Many small- and medium-sized banks are still really suffering. (http://seekingalpha.com/article/303929-business-lending-is-increasing-especially-at-the-largest-u-s-banks)

The Federal Reserve can’t really afford to tighten up at all because of the weakness that still exists within much of the banking system.  (See my post, “Post QE2 Federal Reserve Watch: Part 3” of November 7: http://maseportfolio.blogspot.com/. ) And, the FDIC still continues to close two banks per week and this does not include any banks that have been acquired and absorbed into other banks within the system.

The general desire within the economies of both Europe and the United States is to continue to shed debt…to de-leverage.  But, if this de-leveraging takes place at the same time that the economies of Europe and the United States go into another recession, the situation can become a cumulative one.  That is, de-leveraging can contribute to slower economic growth or even declining growth, which leads to more de-leveraging, which leads to even slower economic growth and so on.

This is a debt deflation.

We are not there yet, but, it seems as if we are edging closer to the precipice. 

The problem seems to be that this situation cannot be undone by fiscal stimulus.  If people want to de-leverage they will de-leverage.  Adding more debt to the situation, even government debt created through more government spending, does not help the situation as the “fundamentalist” Keynesian would like to think.  More debt implies more taxes in the future, which just adds that much more of a burden to the person trying to de-leverage.  And, maybe, this just adds incentives to the equation leading the individual to take a debt payment “holiday”.

But, more debt write-downs can cause more debt write-downs.  And, this is the problem of a debt deflation.  It can become cumulative.  And, this is something the Keynesian models cannot pick up.

And, writing down debt for some people just means that someone else has to “eat” the loss elsewhere…and then someone else has to take a loss…and so on and so forth.  The consequences of debt do not just go away. 

The dilemma: if fiscal spending is not an option and monetary policy is basically “spent”, what is there left to do?  Not much?  Is the problem of creating a situation where there is too much debt outstanding that you just have to wait until people work off the excess debt?

This is a conclusion that most people don’t like.

Business Lending is Increasing, Especially at the Largest US Banks

Business lending continues to accelerate in US commercial banking system according to the latest data released by the Federal Reserve System.  Although overall lending has not increased by much in the commercial banks, only about $27 billion year-over-year at all domestic and foreign-related institutions, business loans (commercial and industrial loans) rose by more than $95 billion. 

True, many of these loans have gone to support acquisitions and other uses that are not directly related to expanding economic expansion.  Still, it is good to see more life in this particular area of bank lending.

Most of the increase in business lending came from the largest twenty-five banks in the country and foreign-related financial institutions.  Business loans did increase modestly at the small- and medium-sized banks, but not by much.

Commercial banks continued to allow their real estate and consumer loans to run off, the largest declines coming in the commercial real estate area.  All real estate loans at commercial banks decreased by almost $160 billion, year-over-year, with $86 billion of the decline coming at the largest twenty-five commercial banks and almost $70 billion coming in the rest of the domestically chartered banks.  The largest proportion of these declines came in the commercial real estate area. 

Consumer loans declined by about $41 billion in the whole banking system, year-over-year, with $38 billion of the decline coming in the largest 25 banks.

On another note, one can still see how the Federal Reserve is helping to finance banks in the eurozone.  Cash assets in the whole commercial banking system rose by almost $620 billion, year-over-year, with the rise at the foreign-related financial institutions absorbing almost $490 billion of the total.  At the same time the net deposits to foreign offices at these foreign-related financial institutions rose by more than $590 billion.  The average increase in these net deposits to foreign offices over the past month was another $50 billion. 

The Federal Reserve has done what it can to supply liquidity to European-related financial institutions to help them through the recent financial crisis.

I still have substantial concern about the smaller commercial banks in the United States.  The statistics still do not look good to me.  The total assets at the “smaller” banks rose by about $58 billion over the last year, but over $39 billion of that increase came in the cash assets of these institutions.  Although business loans at these institutions rose modestly, as mentioned above, total loans at these “smaller” banks dropped by almost $60 billion.  These “smaller” banks are just not growing.

A very large number of these smaller banks are just “sitting on their hands” hoping to survive.  These banks are doing everything they can to work out their loan portfolios and to become more liquid.  The reserves for bad assets have declined, but these declines are coming at the healthier banks.  And, given the low interest rates that can be earned on securities, the profits of many of these smaller banks are not sufficient to help them recover from the bad assets that are still on their balance sheets.  It is just amazing the numbers related to bad commercial real estate loans that are on these balance sheets. 

One could say that the good news is still related to the fact that there are not major disruptions occurring in the commercial banking sector.  This “peace and quiet” allows the FDIC to close as many banks as need to be closed without a big fuss.  This year 85 banks have been closed, just under 2 per week.  This figure, however, does not include the decline in the number of banks still open due to acquisitions.  I am still expecting some 2,000 or so commercial banks to drop out of the banking system over the next five years or so. 

It is hard to imagine that bank lending will grow much in the future given all the vacant residential real estate and commercial real estate that is around and all the foreclosures that are still to come.  An examination of the commercial banking sector does not give us much hope about the possibility of a more rapid expansion of the economy. 

The Smaller Banks Continue to Lose Ground

First, we need to define what the Federal Reserve calls “Small” banks.  The Federal Reserve defines small banks as domestically chartered banks that are not counted among the largest 25 domestically chartered banks in the United States.  Hence, “Large” domestically chartered banks are the largest 25 domestically chartered banks in the United States. 

As of September 7, 2011, the largest 25 domestically chartered commercial banks in the United States account for 56 percent of all the banking assets in the United States.  The smaller banks represent about 28 percent.  Foreign related financial institutions control about 16 percent.    

From August 2010 to August 2011, the total assets held by the small banks in the United States grew by one-half the rate at which the total assets in the largest 25 banks.  The “large” banks grew at a 1.4 percent annual rate while the “small” banks grew by 0.7 percent.

Over the last calendar quarter from the banking week ending June 1 through the banking week ending September 7, the smaller banks actually shrank by almost $20 billion while the larger banks grew by about $165 billion. 

Over this last quarter, “Loans and Leases” at the smaller institutions dropped by almost $70 billion.  At the largest 25 banks, “Loans and Leases” rose by over $130 billion.  At the smaller banks, loans fell in ALL categories. 

From the banking week ending August 3 through the banking week ending September 7, “Loans and Leases” at the smaller banks rose by only $1.5 billion while they rose by more than $30 billion at the 25 largest banks. 

One could say that lending activity is increasing on Wall Street but not on Mail Street.   One could ask questions, however, about the type of loans that the larger banks are initiating.  See my posts from last week: http://seekingalpha.com/article/293657-bankers-expect-weak-profit-performance-in-the-future and http://seekingalpha.com/article/293893-some-banks-are-stretching-for-risk.   

But, business loans are not suffering the most at the smaller banks.  Over the past year, residential real estate loans (home mortgages) at these smaller banks have declined by more than 6 percent, year-over-year.  Over the past quarter these loans have fallen by $12 billion. 

And the smaller banks still are suffering through the commercial real estate decline as these loans declined by almost 7 percent, year-over-year through August.  Commercial real estate loans at these banks declined by more than $40 billion over the last quarter alone. 

The FDIC reports that there were 6,413 commercial banks in the banking system as of June 30, 2011.  Of this number, 865 banks were included on the FDIC’s list of problem banks for this date, more than 13 percent of the banks in insured at that time.  Troubled banks total even more than this, some estimate that more than twice this number are very fragile institutions. 

From these data one can argue that bank lending activity may be picking up, but it is not picking up among many of the smaller banking institutions that still face serious balance sheet troubles.  These organizations are not going to participate in any economic recovery and, in fact, are going to have to be closed or absorbed into the banking system that will remain.  As mentioned above, even though loans may be picking up in the largest 25 banks in the country, the loans may not be going into the physical investment that would cause the economy to grow faster than it is. 

FOREIGN RELATED INSTITUTIONS, QE2, AND THE EUROPEAN BANKING CRISIS

Dollar deposits continue to flow out of the United States into foreign banking offices through domestically located foreign related institutions.  From August 2010 through August 2011, cash assets at these domestically located foreign related institutions rose by about $470 billion!  This increase in cash assets tracks closely the Federal Reserve’s implementation of QE2 and represents about 75 percent of the roughly $630 billion rise in cash assets of the whole United States banking system. 

The interesting thing for our purposes is that the item on the other side of the balance sheet that most closely tracks this increase in the cash assets of foreign related banking institutions is “Net Due to Foreign Offices.”  That is, this money is going off shore. 

From August 2010 through August 2011, this account, “Net Due to Foreign Offices”, rose by almost $540 billion.  In the last quarter it rose by over $160 billion.  In the last month it rose by $112 billion. 

Can the rise in this this account be associated with the sovereign debt crisis in Europe and the recent problems faced by many of the large European banks?

I believe one can make a pretty strong case for this conclusion.  The Fed’s QE2 preceded the agreements that the central banks made last week to provide more US dollars to European banks. 

Of course, this provision of US dollars to the world is not spurring on economic growth although it may be helpful to preventing another Lehman Brothers meltdown.  

Foreign-Related Financial Institutions Continue to "Suck Up" U. S. Excess Reserves

For your information, 0.4 percent of the banks in the United States, the largest 25 commercial banks, control 56 percent of the banking assets in the country. 

The smallest banks, banks less than $100 million in total assets, which make up 35 percent of the banks in the country, control 1.0 percent of the banking assets in the country.

The next size category, commercial banks with more than $100 million in assets but less than $1.0 billion in assets, make up 57 percent of the number of banks in the country.  These banks control another 9.0 percent of the banking assets in the country.

Consolidating these last two categories we find that 92 percent of the commercial banks in the country control only 10 percent of the banking assets of the country. 

Just thought you might want to know these facts.

Over the past year, the total assets in the banking system in the United States grew by a little more than $630 billion.

Over the past year, the cash assets in the banking system in the United States grew by a little more than $650 billion!

Thank you, quantitative easing!

Of the $650 billion increase in cash assets, over 75 percent of the increase went into the cash assets of foreign-related banking institutions in the United States.  And, over 85 percent of this increase went into the amount of liabilities due to the foreign offices of these foreign related banking institutions. 

Three cheers for the “call” trade!

And, what about stimulating loan demand in the United States to get the economy going?  The loans and leases at all commercial banks dropped by about $75 billion over the past year. 

Business loans (commercial and industrial loans or C&I loans) did rise by a little more than $55 billion during this time period but the increase largely took place at the largest 25 banks; business loans at the remaining 6,400 banks in the country stayed relatively flat. 

Over the latest 13-weeks business loans fell fairly dramatically at the smaller banks as the amount of assets in the smaller banks has actually declined. 

But, it is still the real estate area that continues to suffer.  Real estate loans on the books of commercial banks fell by about $175 billion over the past 12-month period.  Dollar-wise, the drop was roughly the same between the largest 25 banks and the rest of the banking system. 

The major part of the decline, however, came in the commercial real estate area, which declined by about $125 billion, again, with the largest banks and the smaller banks declining by about equal dollar amounts.

Over the last 13-week period, the decline in commercial real estate loans seemed to accelerate in the smaller banks relative to the larger banks.  This points to the fundamental problem the smaller banks are having with their lending in the commercial real estate area.  This in not supposed to get better in the near term.

The conclusions I draw from these data are: first, that the quantitative easing (QE2) of the Federal Reserve primarily went “off shore” and to this day remains “off shore.” 

Second, many of the smaller commercial banks in this country are in very serious financial condition and many of the problems are located in the commercial real estate area.  But, it seems as if there may be growing trouble located in their basic business loan portfolios.

Third, fundamental business lending seems to be picking up somewhat, but primarily at the largest 25 commercial banks in the country.  Commercial real estate lending at these banks, however, has not picked up and is unlikely to do so in the near future.

These statistics do not point to a banking system that is ready to underwrite a strong economic expansion.   

Federal Reserve Money Continues to go Off-Shore

Yesterday in my post I reviewed the consequences of QE2 on the Federal Reserve balance sheet. (http://seekingalpha.com/article/276674-qe2-watch-no-qe3-in-sight)

The bottom line: “The ‘net’ increase in securities held outright by the Federal Reserve has been $589 billion, pretty close to the $600 billion ‘net’ increase promised.

Reserve balances at Federal Reserve banks, a proxy for excess reserves in the banking system, have increased by $584 billion to $1,594 billion over this time period. Actual excess reserves in the banking system averaged $1,610 billion for the two-week period ending June 15, 2011.”

Cash assets (excess reserves) at commercial banks in the United States rose by about $800 billion from December 29, 2010 to June 15, 2011 and closed slightly below $1,870 billion on the latter date. 

Basically the Federal Reserve pumped all these reserves into the banking system and there they seemingly sit.  Yet, the amazing thing is that of the almost $800 billion increase in cash assets in American banks, almost 85 percent of the increase, or about $670 billion, ended up on the balance sheets of Foreign-related Institutions in the United States. 

And, what increased on the other side of the balance sheet?

Net deposits due to related foreign offices.  These balances rose by almost $500 billion since the end of last year. 

In essence, it appears as if much of the monetary stimulus generated by the Federal Reserve System went into the Eurodollar market.  This is all part of the “Carry Trade” as foreign branches of an American bank could borrow dollars from the “home” bank creating a Eurodollar deposit.  This Eurodollar deposit could be lent to foreign banks or investors and this would not change the immediate dollar holdings of the American bank.  This lending and borrowing in Eurodollar deposits could then multiply throughout the world.  And, the American bank might be the ‘foreign-related” institution mentioned above and included in the statistical reports.

Note that the original dollar deposit created by the Fed is still recorded as a deposit at one Federal Reserve bank no matter how much shifting around the borrowing and lending in the Eurodollar market occurs.    

Thus, it appears as if the Federal Reserve pumped one-half a trillion dollars off-shore since the end of 2010!

And, this is going to stimulate spending and getting the economy to grow faster?

Cash assets at the smaller banks remained relatively flat over the last six months…and over the last three months.  Thus, the reserves the Fed was pumping into the banking system were not going into the smaller banks. 

And, although the largest twenty-five banks in the country increased their cash assets by about $130 billion over the last six months, these banks have been reducing their cash balances (by a little more than $30 billion) over the last three months. 

What have the domestically chartered commercial banks been doing over the last six months?

Basically, the twenty-five largest domestically chartered commercial banks have been modestly increasing their loans to businesses, both in the three-month period and the six-month period.  Commercial and Industrial loans as well as commercial real estate loans have been increasing at the largest banks over the past three-month period. 

However, business loans continue to “tank” at the smaller banking institutions.  For example, Commercial and Industrial loans at the smaller institutions dropped by almost $5.0 billion from March 30 to June 15.  Commercial Real Estate loans took an even bigger hit of almost $35 billion. 

Also, at the smaller banks, residential mortgages continue to decline…by a little over $9.0 billion since March 30 and by almost $35 billion over the last six months. 

The real lending by commercial banks is not taking place in the United States.  The lending is taking place off-shore, underwritten by the Federal Reserve System and this is doing little or nothing to help the American economy grow. 

It does seem to help produce inflation elsewhere which gets translated back into the United States in the price of imports.

The Fed has not yet gotten bank lending going, it has not yet caused an increase in the money stock measures, and it has not yet stimulated the economy to any degree. 

The Fed may have helped the FDIC close banks in an orderly fashion and it may have helped raise the prices of commodities world-wide. 

For all the efforts exerted in QE2, the results are not very encouraging.

NOTE: As mentioned in my post yesterday, I will not be posting anything for about a week or so.

Fed Continues to Pump Reserves into Foreign-Reated Institutions in United States

Over the past thirteen week period the Federal Reserve has pumped roughly $350 billion of excess reserves into the banking system. 

From February 2, 2011 to May 4, 2011, cash assets at commercial banks rose by $400 billion.  (Cash assets at commercial banks can serve as a rough proxy for the measure excess reserves.)   

During the same time period, $306 billion of the $400 billion increase in cash assets of commercial banks in the United States went to foreign-related financial institutions.

On May 4, 2011, of the $1,586 billion of cash assets in commercial banks in the United States, 50%, or exactly half of these cash assets, resided on the balance sheets of foreign-related financial institutions.   

The quantitative easing of the Federal Reserve continues to support, in large part, the “carry trade” where funds generated in the United States continue to find their way into foreign markets. 

This is not the first time I have written on this subject: http://seekingalpha.com/article/265481-large-foreign-related-banks-now-hold-776-billion-in-cash-assets.  Actually, this is the third time I have written about the subject: http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions.

Over the past four-week period, cash assets at all commercial banks actually declined by about $9 billion.  However, cash assets at the foreign-related institutions rose by $27 billion during this time period while cash assets at the largest 25 commercial banks in the United States fell by approximately $21 billion and they fell at smaller domestically chartered United States banks by $14 billion.

There is some good news, however!

The good news is that business loans, commercial and industrial loans, at commercial banks really seem to be on the up swing.  Over the past thirteen-week period, C&I loans have increased by $35 billion.  Roughly two-thirds of this increase, or about $23 billion, of the loans came from the largest 25 banks in the country.  However, C&I loans were only up modestly at the smaller commercial banks over this period. 

In the past four-week period business loans were up $10 billion and 60 percent of these, or $6 billion, came from the largest banks.  Again, C&I loans were up at the smaller institutions by a modest amount. 

So, banks, especially the larger banks, seem to be lending again to business, something that is vitally needed if the economic recovery now under way is to really pick up. 

If the goal of the Federal Reserve in conducting QE2 was to get business loans increasing again, then it seems to have succeeded.  Sure, we will have to wait a little longer to get more confirmation of this trend, but this is the first time in this cycle that business loans really do seem to be increasing.

The not-so-good news: the volume of real estate loans on the books of commercial banks continues to tank.  Over the past thirteen-week period, real estate loans at all commercial banks dropped by almost $90 billion.  Over the past four-week period, these loans declined by over $18 billion. 

Almost all of the decline has come at the largest 25 domestically chartered banks in the country.

Over the past thirteen weeks, the major part of the decline came in the area of residential loans ($41 billion), which was closely followed by the fall in commercial real estate loans ($34 billion).  In the past four weeks, the bulk of the decline came in the residential area ($12 billion). 

So, business loans appear to be picking up but the real estate market continues to decline: mixed signals for any sustainable economic recovery.

Maybe, however, this is all the Federal Reserve hoped to achieve at this time.  It seems as if almost everyone believes that it will still be a while before the real estate markets, both residential and commercial, bottom out and start to pick up steam. 

Maybe all the Federal Reserve thinks it can do is to get businesses borrowing again and with that borrowing put some people back to work.  And, it seems that if the Fed can achieve this small win it would think that flooding the rest of the world with United States dollars has been worth it.   

It would be too bad if a substantial part of the uptick in business lending was just going to finance the merger and acquisition activity of large businesses: http://seekingalpha.com/article/269056-the-latest-merger-binge-and-the-economy.   

Commercial Banks Closures in 2011

The Federal Deposit Insurance Corporation oversaw the closing of six banks on Friday, April 15.  This brings the total for 2011 up to 34 banks, a pace of about 2.3 banks per week. 

In 2010, 157 banks were closed, a pace of about 3.0 banks per week.

The problem bank list published by the FDIC every quarter rested at just under 900 banks (out of 6,529 banks in the banking system) on December 31, 2010.  We are waiting for the release of this number for the March 31, 2011 date.

The other number that is important in this respect is the number of banks that were acquired or merged into other banks.  Last year there were 153 banks dropping out of the industry due to such consolidations. 

Thus, the number of banks in the commercial banking system declined by 310 units last year or at a rate of approximately 6.0 banks leaving the system per week.

Most of the banks dropping out of the banking system are smaller institutions.  However, last week a $3.0 billion bank was closed so it is not all just the very smallest banks that are leaving the system.  Still, it not the largest 25 commercial banks in the banking system, the banks that control almost 60% of the total assets of the industry, that are departing.

The question still remains about the health of this industry.  Is the number of problem banks in the industry going to remain around 900 institutions?  Are bank departures going to continue to run off at the rate of 5 to 6 banks a week?  Will these rates lessen this year?  Or, will they increase?

Supposedly, the condition of the smaller banks is getting better.  But, as we saw with Bank of America last week, the overhang of bad mortgage loans still plagues some institutions.  Right now, I believe that the drop off in foreclosures on residential mortgages is misleading because the whole foreclosure issue has become so political that we probably won’t really have a good idea about the situation in the housing industry and in loan writeoffs for some time. 

We do know, however, that there are a lot of commercial real estate loans coming due over the next twelve months and the word I hear about the refinancing of these loans is not good.  Vacancies in commercial properties remain high and cash flows have not picked up significantly.  Furthermore, as more and more political entities downsize, more and more office properties used by these state and local governments are being vacated.  This was not expected a year ago.

In addition, I am also hearing that more small- and medium-sized businesses have exhausted their efforts to re-structure and just cannot go on much further.  As their loans come due, they are informing their banks that they are not going to be able to pay off their loans and must re-finance.

Thus, the banks have to make a decision about whether or not they roll over the loans for another period of time.  Or, do they “bite the bullet” and say they just cannot keep the loan going with no real sign that things are going to get better.

Then there are the examiners looking closely over the shoulders of these bankers.  The regulators are still running scared and, given all the restructuring of the regulatory institutions, don’t want to have the people in the new regulatory alignment holding them accountable for being too easy on these “failing” banks.  There is enough finger-pointing going on with respect to the “lax” regulatory environment that existed in the past. 

Bankers, especially from the smaller banks, feel caught in the middle of this exercise.  They want to do what they can to help their customers survive.  Yet, they are being pressed by the regulators, who also feel they are under excessive pressure, to not show overly-optimistic hopes about the ability of these businesses to repay.   In fact, the result may be that a too pessimistic approach is taken toward the quality of the bank loans. 

As a consequence, we will probably see the list of problem banks remain somewhere around their current highs and we will probably see business loans and commercial real estate loans continue to decline on the balance sheets of the banking industry. 

And we will continue to experience a decline in the number of banking institutions in the United States. 

The crucial element of this decline is that it is that the decline takes place in an orderly fashion. 

I believe that the Federal Reserve has contributed greatly to the achievement of this orderly reduction in the number of commercial bans in the banking industry.  Keeping short-term interest rates so low and pumping so much liquidity into the banking industry has reduced what could have been a very chaotic evacuation into a relatively peaceful exodus. 

Of course, there are other consequences to the Fed’s policy and we will have to deal with those in the future.  For now, the Federal Reserve has kept the banking system open.

Until the history of the recent financial collapse is fully understood and written up, most of us will probably not know how serious the banking crisis has been.  We get bits and pieces of this seriousness, but government officials have not really believed that the depth of the problem should be presented to the rest of the world.

For example, buried in the column Global Insight by Tony Barber in the Financial Times this morning is this observation: “For the truth about the eurozone’s crisis…is that the rescues of Greece, Ireland and Portugal are at heart rescues of European banks…Restructuring these countries debts would involve losses for German banks…” (http://www.ft.com/cms/s/0/4ed1d54a-6915-11e0-9040-00144feab49a.html#axzz1JsjXsOj5).   But this is not what is expressed in most governmental commentary. 

It appears as if the credit inflation of the past fifty years in America, and in Europe, seriously infected the banks and the cure for this infection is taking a very long period of time to achieve and is creating, in the process, economic and financial dislocations that we may not fully recognize for many years. 

For now, however, we can only hope that the cure takes place in an orderly fashion. 

Banking and Real Estate: The Problems Are Still There

Fed Chairman Ben Bernanke just informed Congress that people were not anxious to buy homes. He commented that “there’s no demand for construction to build homes and so the construction industry is quite reduced.”

As a consequence, the Fed will continue to purchase Treasury securities up to some $900 billion, $300 billion to replace maturing mortgage-backed securities that have rested in the Fed’s portfolio and an additional $600 billion to expand reserves in the banking system.

My feeling has been that this injection of reserves into the banking system has been to protect the banking system, especially the smaller banks, and keep failing institutions open for as long as possible so that the FDIC can close these insolvent banks in an orderly fashion.

This, of course, is different from what the Fed has been telling us. The Fed has argued that their reason for the injection of liquidity into the banking system has been to help spur on bank lending and help accelerate economic growth.

The data that continues to come in from the real estate sector does nothing to convince me that the Fed’s statement is the correct one.

Data coming in from the real estate sector, I believe, continues to support my contention that the loan portfolios of many smaller financial institutions remain seriously underwater.

The median sales price of a house sold in February, the Commerce Department has just reported, was $202,100, down from $221,900 a year earlier. This is a drop of almost 9%.

Just one added piece of information: last month’s price was at it lowest level since December 2003 when the median sales price stood at $196,000.

This just exacerbated the problem of “underwater” mortgages. CoreLogic, Inc., reported in early March that about 23%, or roughly one out of every four, mortgages in the United States had outstanding balances that were higher than the reported value of the secured properties.

In addition, a record 2.2 million homes were in foreclosure in January of this year. The number of homes in foreclosure had slowed down in the last half of 2010 because of all the fuss being made about how banks had not used proper methods to foreclose on many properties. This slowdown seems to have ended.

Furthermore, the purchases of new homes declined to the slowest pace on record.

Housing starts dropped in February to an annual rate of 479,000, the lowest level since April 2009.

And, construction permits slumped to a record low.

The commercial real estate sector is now getting hit with a new phenomenon…state governments and municipalities that are under tremendous budget pressures are downsizing and cutting back on office space. As a consequence, a lot of commercial office buildings are standing empty and their owners, who are not the states or municipalities, are faced with the task of trying to fill up the empty space.

The banking system holds the paper on a lot of this real estate.

The question is, how big a write-down is the commercial banking system going to have to take…and how fast is it going to have to take it.

The credit inflation the Federal Reserve is trying to create, I don’t believe, will cause housing prices to turn around any time soon in the magnitude needed to save their asset values.

Sooner or later these asset values are going to have to be written down.

Therefore, the efforts of the Fed are just allowing banks to stay liquid enough so that the assets do not have to be written down precipitously. In that way the regulators can control the situation and close the banks that must be closed in an orderly fashion.

But, this raises another question. This question pertains to the length of time the Fed will need to continue to provide liquidity to the financial markets? That is, how long will QE2 be maintained?

The original plans of the Federal Reserve were to call an end to QE2 in June. But, will we need to add on QE3?

My guess is that the Fed will need to continue some kind of program to maintain the “peace and quiet” on the banking front for an “extended period.”

This is a “good news” and “bad news” situation. The “good news” is that events in the banking sector are relatively quiet. The FDIC continues to close banks in an orderly fashion.

The “bad news” is that events in the banking sector are relatively quiet. The Fed must continue some kind of financial support to the banking industry because there are so many real estate related assets in the banking system that are troubled and are in need of a “write down.”

It would seem that as long as there are problems like the ones described above in the real estate sector, there will continue to be problems in the banking sector.

And, as long as there are problems in the real estate sector and the banking sector of this magnitude, the desired pickup in the economy will not be forthcoming.

Federal Reserve Is Providing Cash For Foreign-Related Banking Institutions

Since the end of December 2010 (the banking week ending December 29, 2010) the Federal Reserve has injected almost $200 billion in new reserve balances into the banking system. (See my post of December 18: http://seekingalpha.com/article/253787-fed-s-liquidity-machine-full-speed-ahead.)


Since the end of December 2010 (the banking week ending December 29, 2010) cash assets at commercial banks have risen by more than $280 billion!


Since the end of December 2010 (the banking week ending December 29, 2010) cash assets at foreign-related banking institutions in the United States have risen by more than $175 billion!


In addition, trading assets at these foreign-related banking institutions have risen by $33 billion and a catch-all asset account has risen by $12 billion. (This catch-all account includes things like loans to foreign banks, loans to nonbank depository institutions and loans to nonbank financial institutions.)


All together these accounts at these foreign banking organizations have risen by about $220 billion in the last six weeks, about $30 billion more than the total assets of these foreign-related banking institutions have increased. One could argue that the foreign-related banking institutions are doing pretty well by the quantitative easing that the Federal Reserve is conducting. These foreign-related organizations seem to be doing a lot of trading!


During this same time period the total assets of large domestically chartered commercial banks in the United States have declined slightly.


The total assets of small domestically chartered commercial banks rose by about $30 billion.

Also, during this time period cash assets at the largest 25 domestically chartered banks rose by more than $72 billion and the cash assets at all other domestically chartered banks rose by $38 billion.


Thus, the Fed's QE2 is getting the cash out into the banking system. However, almost two-thirds of the cash seems to be going to foreign-related organizations and not to domestically chartered commercial banks!


Is this what was supposed to have happen?


Over the past 14-week period, cash assets in the banking system have risen by almost $300 billion. Again, over two-thirds of the increase (about $205 billion) came in the cash assets of the foreign-related banking institutions. All of the increase in cash holdings at the largest 25 banks came after December 29, 2010, while cash assets holdings in the rest of the banking system fell in the period before December 29 before rising in the last 6-week period.


One would think that this distribution of cash would not bode well for domestic lending. And, in fact, bank lending was abysmal over the past 6-week period and the last 14-week period.


Since the end of the year, loans and leases at the largest 25 domestically chartered banks in the United States dropped dramatically by about $50 billion, much of this coming in consumer lending although loan amounts were down across the board. Loans and leases held roughly constant in the eight weeks that preceded December 29 at these large banks.


In the rest of the banking system the declines in the loan portfolio came primarily before the end of the year. After falling by about $60 billion in November and December, loans at these institutions rose slightly in the first six weeks of 2011. Notable decreases came in both residential lending and in commercial real estate loans, each declining by a little more than $20 billion over the last 14-week period.


One interesting thing also appeared in the recent statistics. The securities portfolio of the banking system declined over the latest 14-week period by a little less than $40 billion.

However, there were huge differences in the behavior of the largest banks and the smaller banks.


The largest banks REDUCED their holdings of securities by about $96 billion; $67 billion of the total were in U. S. Treasury and Agency securities.


The rest of the domestically chartered commercial banks INCREASED their holdings of securities by almost $60 billion with a $63 billion increase in their holdings of U. S. Treasury securities.


The larger banks got out of securities as interest rates rose through November, December, and January. The smaller banks increased their securities. Is this bad timing on the part of the smaller banks?


So, here we are with the Federal Reserve pumping reserves into the banking system like crazy.
But, two-thirds of it is going to foreign-related banking institutions?


And, commercial bank lending continues to contract?


What is wrong with this picture?


I am feeling such a disconnect between Ben Bernanke’s view of the world and what seems to be going on in the world. When Mr. Bernanke speaks I really wonder what planet he is on…it certainly doesn’t seem to be the one that I am on.


Also, I am getting tired of Mr. Bernanke putting the blame for all his troubles on the backs of others. He began this practice in the early 2000s and it continues on today. He doesn’t accept the fact that some of the mistakes of the past are his. As Stephen Covey has said, if all the blame for the problems one faces is “out there”…that’s the problem!