Bank Holding Companies
The Flow of Funds accounts from the Federal Reserve System just came out today. This gives us a chance to look at parts of the financial system that we do not get to look at on a more frequent basis.
In terms of the banking sector, one area of interest at this time is the activity going on in bank holding companies. In terms of assets, bank holding companies, at the end of the third quarter, 2009, are holding $2.8 trillion in assets, up from $1.9 trillion one year ago and up from $1.8 trillion at the end of 2007. So assets in bank holding companies rose by almost 50% in the past year.
The large increase in assets came in the area of investments in nonbank subsidiaries. The rise from the end of the third quarter of 2008 was $537 billion, or 135%. The increase since the end of 2007 was $592 billion, or an increase of 172%
These holding companies also increased their investment in bank subsidiaries as well, but only by $164 billion or by 14% since the end of the third quarter 2008. The increase since the end of 2007 was $188 billion.
Financing this increase in assets was an increase in bonds issued by these holding companies and in residual equity. The net increase in corporate bonds issued was $508 billion for the year ending in the third quarter of 2009. The net increase since the end of 2007 was $553 billion.
There was roughly an $400 billion increase in the residual equity of these organizations during this time period. The increase in residual equity since the end of 2007 was approximately $500 billion.
These increases in bank holding company assets took place at the same time that total assets in U. S. chartered commercial banking sector rose only by about $139 billion from the third quarter of 2008 to the third quarter of 2009. It should be noted that during this same time period total bank loans in the banking industry declined by almost $383 billion, with reductions taking place in every category of loan.
Note that since the end of the third quarter 2008, vault cash and reserves at the Federal Reserve rose by $384 billion. The increase since the end of 2007 was $540 billion.
It is obvious that banks and bank holding companies are not doing the ordinary business of banking.
The commercial banks, themselves, are becoming “pools of liquidity”, but they are not lending.
It seems that bank holding companies, however, are further diversifying into nonbank subsidiaries because of the tremendous opportunities for profit that are now available to them in these areas. Also, it seems as if this is all happening for the largest banks and the largest bank holding companies.
So, here is the picture: commercial banks are essentially static right now; nothing is happening in the industry as a whole.
Bank holding companies are moving ahead full steam: and what they are doing is very, very profitable!
Saving Institutions
The thrift industry continues to shrink!
In the last four quarters, the total financial assets in savings and loan associations, mutual savings banks, and federal savings banks fell by $145 billion, or by about 10%, to just $1.4 trillion. Since the end of 2007, financial assets have fallen by $442 billion, or by about 25%.
One really has to wonder about the existence of this part of the finance industry and the need for such an expensive regulatory structure to support it.
Its main reason for existence, the issuing of mortgages, continues to erode as mortgages on the books of these savings institutions fell by $155 over the past year, an 18% decline. Since the end of 2007, mortgages at these institutions fell by $367 billion, a decline of one-third. Statistics indicate that, on average, institutions in this industry are just about breaking even, profit-wise.
Although it is not getting a lot of headlines in the press, the savings industry is not doing too well. Maybe it is now too insignificant to warrant much attention!
Credit-Unions
Credit unions continue to grow. They ended the third quarter at $873.4 billion in total financial assets, increasing by $73 billion over the last four quarters.
One wonders when the total assets at credit unions are going to exceed that at savings institutions.
Although the totals are not large, credit unions continue to increase their loan portfolios across the board.
The total amount of credit extended by credit unions was $592 billion at the end of the third quarter 2009, roughly two-thirds of the $875 billion in loans on the books of savings institutions. Credit unions have only about 63% of the assets that savings institutions do.
Mortgages on the books at credit unions are about 44% of the amount of mortgages that sit on the books of savings institutions, up from 35% at the end of the third quarter in 2008. But, consumer loans are 308% of the total of consumer loans at savings institutions. This is just a little higher than it was one year ago.
Credit unions seem to be doing very well and continue to be on the rise!
Showing posts with label securitized mortgages. Show all posts
Showing posts with label securitized mortgages. Show all posts
Thursday, December 10, 2009
Monday, October 27, 2008
The Threat Of Too Much Regulation
Once again, Tom Friedman of the New York Times has some very worthwhile things to say. Whereas one may not totally agree with all of his arguments, I believe that one can always gain something by reading him.
This past Sunday, Friedman commented upon the government bailout and the coming effort to re-regulate the financial markets: http://www.nytimes.com/2008/10/26/opinion/26friedman.html. He quotes the consultant David Smick: “Government bailouts and guarantees, while at times needed, always come with unintended consequences.” Then he goes on to say that he, Friedman, “is not criticizing the decision to shore up the banks…We need better regulation. But, most of all, we need better management.”
Friedman concludes, however, that “We must not overshoot in regulating the markets because they (the bankers) overshot in their risk-taking.”
This is all the further the argument is carried these days: they (the bankers) “overshot in their risk-taking.” There is very little discussion about how the environment was created in which this excessive risk-taking arose. Since almost all of the blame is falling on the bankers, it is to be expected that almost all the re-regulation will also fall on the bankers.
But, Friedman argues, “We must not overshoot in regulating the markets…” and rightfully so. We must not overshoot in regulating the markets because maybe…just maybe…the environment for excessive risk-taking was created by the government and not by the bankers. This is not a new argument, but it is one that tends to be forgotten while people focus primarily on the current turmoil that is swirling around them. It also tends to be forgotten because economic consequences tend to occur with a substantial lag behind the causative events that started everything off.
In looking for such a cause, I once again return to the failure of the current administration to combat the decline in the value of the United States dollar. The performance of a currency relative to other currencies depends upon market perceptions about future rates of inflation. If the inflation rate in the home country is expected to be more rapid than the inflation rates in other countries, the value of the home country’s currency will tend to decline. The value of the home country’s currency will tend to appreciate when the opposite is the case.
The value of the United States dollar began to decline in 2002 and continued to decline through August 2008. This decline followed about seven years in which the value of the United States dollar rose. So, it can be assumed that participants in foreign exchange markets came to believe that future inflation in the United States would exceed that in other countries, a reversal of the belief that had existed over the previous decade.
What seemed to be the cause of this change in expectations? The change seems to be very closely related to the Bush tax cuts, the consequent anticipation of substantial deficits in the Federal budget, and the acceleration in the costs associated with the war on terror and in Iraq. The deficits themselves are not considered to be inflationary, but in the western world, every major increase in government budget deficits were connected with a monetization of the debt at some time in the future. Given the size of the projected deficits it was expected that the United States government could not avoid monetizing a large portion of these anticipated deficits.
In the case of the United States, however, an unexpected path was taken. The large deficits of the United States government were underwritten by China, Middle-Eastern oil producing nations, and others. In effect, foreign governments monetized the Bush deficits taking the pressure off the Federal Reserve, even allowing the Fed to keep short term interest rates at extremely low levels for three-to-four years. This was something unheard of in terms of global economics.
And, where did a great deal of the funds connected with the monetized debt go? It went into the United States housing market. The history of financial innovation in the late twentieth century is a fascinating one. Of especial interest is the growth of the market for securitized mortgages. The first package of securitized mortgages came to market in the first half of the 1970s. By the middle of the 1980s, mortgage-related securities became the largest component of the capital markets. Playing in this end of the market became ‘sexier’ than any other. And, the attraction grew and grew and drew in more and more new players from around the world. The market for securitized mortgages became the playground for the world and attracted a large portion of the United States dollars now circulating around the globe.
Thus, through the market for securitized mortgages, the United States housing market became one of the bubbles that resulted from the ‘monetizing’ of the large deficits that were created by the United States government. The expected United States inflation came about through unusual channels, but the participants in the foreign exchange markets were correct in calling for the decline in the value of the United States dollar.
In my view, the speculative atmosphere that evolved in financial markets and financial institutions which resulted in excessive risk-taking was the result of the failure of policy makers to defend the value of the United States dollar. Most other countries in the world that created government deficits that were monetized had to back off from such policies as the value of their currencies declined on foreign exchange markets. This response was due to the resulting inflation in those countries. (France in the 1980s is a prime example.) These countries did not have others within the world like China and the countries of the Middle East, to absorb their debt the way that China and the Middle East purchased the United States debt.
The massive United States government deficits went global and in going global helped flood world financial markets with funds that narrowed interest rate spreads and created an environment where more and more risk had to be taken to keep institutional returns up. Financial leverage and other techniques of financial engineering became commonplace. The structure of the marketplace became more and more fragile.
The rest is history. But, now we have to deal with the aftermath. In my mind, the fault for the financial collapse does not lie solely with the bankers…a large share of blame should fall to the Government officials that created the environment in which the bankers had to operate. Yes, one can argue that the bankers took on excessive risk. But, one cannot let the Government officials off the hook. We cannot afford to over-regulate the financial markets because the government was irresponsible.
Yes, the financial markets need to be regulated but…who is going to regulate the regulators and the policymakers? Congress does not seem capable of it.
It seems to me that the regulators and the policy makers need some oversight but the only ones
that can ultimately provide that oversight are you and me…the voters. How can we, therefore, react in a timely manner against “bad policy” and bring about a change in direction? That, as always, remains the main question.
This past Sunday, Friedman commented upon the government bailout and the coming effort to re-regulate the financial markets: http://www.nytimes.com/2008/10/26/opinion/26friedman.html. He quotes the consultant David Smick: “Government bailouts and guarantees, while at times needed, always come with unintended consequences.” Then he goes on to say that he, Friedman, “is not criticizing the decision to shore up the banks…We need better regulation. But, most of all, we need better management.”
Friedman concludes, however, that “We must not overshoot in regulating the markets because they (the bankers) overshot in their risk-taking.”
This is all the further the argument is carried these days: they (the bankers) “overshot in their risk-taking.” There is very little discussion about how the environment was created in which this excessive risk-taking arose. Since almost all of the blame is falling on the bankers, it is to be expected that almost all the re-regulation will also fall on the bankers.
But, Friedman argues, “We must not overshoot in regulating the markets…” and rightfully so. We must not overshoot in regulating the markets because maybe…just maybe…the environment for excessive risk-taking was created by the government and not by the bankers. This is not a new argument, but it is one that tends to be forgotten while people focus primarily on the current turmoil that is swirling around them. It also tends to be forgotten because economic consequences tend to occur with a substantial lag behind the causative events that started everything off.
In looking for such a cause, I once again return to the failure of the current administration to combat the decline in the value of the United States dollar. The performance of a currency relative to other currencies depends upon market perceptions about future rates of inflation. If the inflation rate in the home country is expected to be more rapid than the inflation rates in other countries, the value of the home country’s currency will tend to decline. The value of the home country’s currency will tend to appreciate when the opposite is the case.
The value of the United States dollar began to decline in 2002 and continued to decline through August 2008. This decline followed about seven years in which the value of the United States dollar rose. So, it can be assumed that participants in foreign exchange markets came to believe that future inflation in the United States would exceed that in other countries, a reversal of the belief that had existed over the previous decade.
What seemed to be the cause of this change in expectations? The change seems to be very closely related to the Bush tax cuts, the consequent anticipation of substantial deficits in the Federal budget, and the acceleration in the costs associated with the war on terror and in Iraq. The deficits themselves are not considered to be inflationary, but in the western world, every major increase in government budget deficits were connected with a monetization of the debt at some time in the future. Given the size of the projected deficits it was expected that the United States government could not avoid monetizing a large portion of these anticipated deficits.
In the case of the United States, however, an unexpected path was taken. The large deficits of the United States government were underwritten by China, Middle-Eastern oil producing nations, and others. In effect, foreign governments monetized the Bush deficits taking the pressure off the Federal Reserve, even allowing the Fed to keep short term interest rates at extremely low levels for three-to-four years. This was something unheard of in terms of global economics.
And, where did a great deal of the funds connected with the monetized debt go? It went into the United States housing market. The history of financial innovation in the late twentieth century is a fascinating one. Of especial interest is the growth of the market for securitized mortgages. The first package of securitized mortgages came to market in the first half of the 1970s. By the middle of the 1980s, mortgage-related securities became the largest component of the capital markets. Playing in this end of the market became ‘sexier’ than any other. And, the attraction grew and grew and drew in more and more new players from around the world. The market for securitized mortgages became the playground for the world and attracted a large portion of the United States dollars now circulating around the globe.
Thus, through the market for securitized mortgages, the United States housing market became one of the bubbles that resulted from the ‘monetizing’ of the large deficits that were created by the United States government. The expected United States inflation came about through unusual channels, but the participants in the foreign exchange markets were correct in calling for the decline in the value of the United States dollar.
In my view, the speculative atmosphere that evolved in financial markets and financial institutions which resulted in excessive risk-taking was the result of the failure of policy makers to defend the value of the United States dollar. Most other countries in the world that created government deficits that were monetized had to back off from such policies as the value of their currencies declined on foreign exchange markets. This response was due to the resulting inflation in those countries. (France in the 1980s is a prime example.) These countries did not have others within the world like China and the countries of the Middle East, to absorb their debt the way that China and the Middle East purchased the United States debt.
The massive United States government deficits went global and in going global helped flood world financial markets with funds that narrowed interest rate spreads and created an environment where more and more risk had to be taken to keep institutional returns up. Financial leverage and other techniques of financial engineering became commonplace. The structure of the marketplace became more and more fragile.
The rest is history. But, now we have to deal with the aftermath. In my mind, the fault for the financial collapse does not lie solely with the bankers…a large share of blame should fall to the Government officials that created the environment in which the bankers had to operate. Yes, one can argue that the bankers took on excessive risk. But, one cannot let the Government officials off the hook. We cannot afford to over-regulate the financial markets because the government was irresponsible.
Yes, the financial markets need to be regulated but…who is going to regulate the regulators and the policymakers? Congress does not seem capable of it.
It seems to me that the regulators and the policy makers need some oversight but the only ones
that can ultimately provide that oversight are you and me…the voters. How can we, therefore, react in a timely manner against “bad policy” and bring about a change in direction? That, as always, remains the main question.
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