The Office of Thrift Supervision (OTS) released statistics on the state of the thrift industry for the second quarter of 2010 on August 25. The industry is limping along, but the signs of a disappearing industry are all over the report.
The cloud over the whole industry is that the OTS will be merged into the Office of the Comptroller of the Currency (OCC) in the upcoming year. (See my post “So Long to the Savings and Loan Industry”, http://seekingalpha.com/article/214460-so-long-to-the-savings-and-loan-industry.) This, of course, is impacting decisions and affecting performance.
Two major figures stand out.
First, industry assets decreased by 15 percent from the second quarter of 2009 to the second quarter of 2010 to $931 billion from $1.1 trillion. From the second quarter of 2008 to the second quarter of 2009, industry assets fell by 27 percent from $1.51 trillion to $1.1 trillion.
Second, the number of supervised institutions declined from 792 thrifts at the end of the second quarter of 2009 to 753 at the end of the second quarter of 2010, just about a 5 percent decline. Yes, there have been thrift failures, but there has also been the constant drop in the number of thrift institutions in existence due to thrift conversions into commercial banks. This latter trend is expected to accelerate as the merger with the OCC proceeds.
One other interesting structural fact concerning the thrift industry I would like to mention. Of the 753 thrift institutions that exist, 402 of these thrifts are owned by 441 thrift holding company enterprises. These 402 thrifts have assets totaling $714 billion which represents 77 percent of all thrift assets. But, one should also note that these thrift holding companies control approximately $4.1 trillion in United States domiciled consolidated assets.
Note that at the end of the second quarter of 2009, there were 459 thrift holding companies supervised by the OTS and these institutions control $5.5 trillion in U. S. domiciled consolidated assets. The decline from this figure to the second quarter 2010 figure is over 25 percent.
Just in comparison, according to the National Credit Union Association, there are close to 7,500 credit unions in the United States, down about 250 from the same time in 2009. However, assets at these credit unions totaled almost $900 billion at the end of the first quarter of 2010, up just about 5 percent from the end of the same quarter in 2009. Total shares and deposits at credit unions rose by 6.7 percent, year-over-year, to a little over $773 billion. The credit union industry continues to grow and in many areas of the country, Philadelphia for one, major expanded credit unions are becoming a force in the local banking markets.
Overall, in the aggregate data released by the Federal Reserve, deposits at all thrift institutions, including credit unions, rose by 0.5 percent from July 2009 to July 2010. The conclusion one can draw for these numbers is that funds are leaving the OTS regulated thrift institutions to go to commercial banks and credit unions.
It is going to be very interesting to watch the credit union sector over the next several years. The interesting question here is whether or not the larger, expanding credit unions can pick up the consumer funds that are leaving savings and loans, savings banks, and commercial banks. Could the banking industry bifurcate into primarily “business” banks and “consumer” banks?
Given all the other factors that are impacting depository institutions one can safely say that the whole landscape of banking and finance is going to change dramatically over the next five to ten years.
Showing posts with label thrift industry. Show all posts
Showing posts with label thrift industry. Show all posts
Friday, August 27, 2010
Tuesday, August 24, 2010
Where is Banking Headed? Not Up!
The biggest problem in the economy, I believe, is the banking system. The government recognizes this and that is why the various agencies within the government are following such bizarre policies. The Federal Reserve has kept its target interest rate below 20 basis points for over twenty months now and it appears as if it will maintain this target for at least six to twelve more months. The FDIC, as of March 31, 2010, had 775 banks on its list of problem banks and Elizabeth Warren claims that at least 3,000 banks are facing severe problems relative to commercial real estate loans. The United States Treasury Department is tip-toeing around banking issues and especially around the government agencies called Fannie Mae and Freddie Mac.
I sure would NOT want to be a bank regulator now. The workloads must be enormous and the pressure must never ease. And, in my view, this situation is not going to change for another three years or so.
For one, the industry is bifurcating. The big institutions are winning. The smaller institutions are going down the drain. One figure I am fond of quoting is that the largest 25 commercial banks in the United States control two-thirds of the assets in the industry. (This is from Federal Reserve statistics.) On March 31, 2010 there were 6,772 commercial banks in the industry (according to the FDIC) so that about 6,750 banks control only one-third of the assets in the industry.
Note this, however. On December 31, 2002 there were 7,888 commercial banks in the United States and on December 31, 1992 there were 11,463. So the number of banks in the US declined by more than 40% in the past 18 years.
But, commercial banks with more than $1.0 billion in assets increased from 380 at the 1992 date to 405 at the 2002 date to 523 this year.
Banks that had less than $100 million in assets fell dramatically during this time period: in 1992 there were 8,292 banks; in 2002 there were 4,168; and in 2010 there were 2,469.
Banks between $100 million and $1.0 billion in asset size rose from 2,791 in 1992 to 3,315 in 2002 and to 3,780 in 2010.
However, check this out. In terms of full time equivalent employees, banks with less than $100 million in assets averaged 24 employees in 1992, 20 employees in 2002, and 17 employees in 2010. The middle size of banks averaged 121 employees in 1992, 90 employees in 2002, and 72 employees in 2010.
It appears as if the part of the banking system that controls less than one-third of the banking assets in the United States has gotten smaller and smaller in terms of size of institution and employment. Yet, during the last fifty years, the people in these institutions have been asked to do more and more in terms of the environment they are working within and the pressures they feel. Banks, throughout this time period, have not been able to just live off the interest rate spread they earn between loans and deposits.
Furthermore, the thrift industry has also shrunk. The Savings and Loan industry is dead! (http://seekingalpha.com/article/214460-so-long-to-the-savings-and-loan-industry) The numbers support this demise. On December 31, 1992 there were 2,390 savings institutions in the United States. This number dropped to 1,466 at the end of 2002 and fell to 1,160 at the end of March 2010. The Office of Thrift Supervision (which was a part of the Treasury Department) is to merge into the Office of the Comptroller of the Currency (which is a bureau of the Treasury). Thrift institutions will become more and more like commercial banks and the idea of the thrift industry will fade into memory. Most of these are very small institutions, not unlike the smaller commercial banks listed above with very few employees.
I go through this list because many of the problems that now exist within the banking system are concentrated in these smaller institutions, formerly the heart-beat of Main Street America. In the last fifty years the financial environment changed substantially and a large number of these depository institutions were just not able to make the transition. We are going through the final stages of the current restructuring of the banking industry. What we will see in the next five to seven years will be difficult to compare with what existed in the last half of the twentieth century.
What changed? Well, the inflation of the 1960s and 1970s brought about higher and higher short term interest rates. For many institutions, the comfortable interest rate spreads the banks and thrifts worked with disappeared and even went negative in some instances. The government’s response was to open up the balance sheets and allow these institutions to diversify and create more services that could earn fee income. Also, new financial instruments were created to allow these depository institutions to get into more exotic types of investments.
A typical situation was one in which a depository institution had only 15 people or less with most of them being tellers or clerks and only two or possibly three that had executive authority. Most of these employees had been with the institutions for a decade or more. These institutions were flooded with investment bankers and others with all kinds of sophisticated ideas about how a $50 million organization could get into high-yielding assets or buy cheap deposits or do many other very innovative things so as to regain profitability. The late 1970s and 1980s are full of stories about how the managements of small institutions were “educated” in the ways of Wall Street. The thrift crisis resulted.
In the 1990s and 2000s even more sophisticated instruments and opportunities were brought to the smaller institutions that thought they were getting good advice to help them operate in the twenty-first century. Part of what the managements got into was commercial real estate deals. This is what Elizabeth Warren has alerted us to. But, there are many, many other institutions that have securities or other assets on their balance sheets that are not performing or are damaged in one way or another.
What is Ms. Warren talking about when it comes to the magnitude of the problem? Is she talking about a 20% write down of some assets? A 25% write down? Do these “small” banks have sufficient capital to take such a write down? Can these small banks raise sufficient new capital to cover such a write down?
Can the banking industry handle another 40% decline in the number of banks in the system? Can the banking industry absorb this contraction in the next three to five years not in 18 years? This would mean a loss of more than three thousand commercial banks and savings institutions in this time period.
This is the environment that the Fed, the FDIC, and the Treasury Department is currently working within. They have not really let us know how serious the problem is. Elizabeth Warren has perhaps given us more information than others within the government would like us to have. Maybe this straight talking is why many people are reluctant to put her in charge of a government agency. She might tell us what is really going on.
Whatever, it just looks as if the banking system has a long way to go in order to regain its health.
I sure would NOT want to be a bank regulator now. The workloads must be enormous and the pressure must never ease. And, in my view, this situation is not going to change for another three years or so.
For one, the industry is bifurcating. The big institutions are winning. The smaller institutions are going down the drain. One figure I am fond of quoting is that the largest 25 commercial banks in the United States control two-thirds of the assets in the industry. (This is from Federal Reserve statistics.) On March 31, 2010 there were 6,772 commercial banks in the industry (according to the FDIC) so that about 6,750 banks control only one-third of the assets in the industry.
Note this, however. On December 31, 2002 there were 7,888 commercial banks in the United States and on December 31, 1992 there were 11,463. So the number of banks in the US declined by more than 40% in the past 18 years.
But, commercial banks with more than $1.0 billion in assets increased from 380 at the 1992 date to 405 at the 2002 date to 523 this year.
Banks that had less than $100 million in assets fell dramatically during this time period: in 1992 there were 8,292 banks; in 2002 there were 4,168; and in 2010 there were 2,469.
Banks between $100 million and $1.0 billion in asset size rose from 2,791 in 1992 to 3,315 in 2002 and to 3,780 in 2010.
However, check this out. In terms of full time equivalent employees, banks with less than $100 million in assets averaged 24 employees in 1992, 20 employees in 2002, and 17 employees in 2010. The middle size of banks averaged 121 employees in 1992, 90 employees in 2002, and 72 employees in 2010.
It appears as if the part of the banking system that controls less than one-third of the banking assets in the United States has gotten smaller and smaller in terms of size of institution and employment. Yet, during the last fifty years, the people in these institutions have been asked to do more and more in terms of the environment they are working within and the pressures they feel. Banks, throughout this time period, have not been able to just live off the interest rate spread they earn between loans and deposits.
Furthermore, the thrift industry has also shrunk. The Savings and Loan industry is dead! (http://seekingalpha.com/article/214460-so-long-to-the-savings-and-loan-industry) The numbers support this demise. On December 31, 1992 there were 2,390 savings institutions in the United States. This number dropped to 1,466 at the end of 2002 and fell to 1,160 at the end of March 2010. The Office of Thrift Supervision (which was a part of the Treasury Department) is to merge into the Office of the Comptroller of the Currency (which is a bureau of the Treasury). Thrift institutions will become more and more like commercial banks and the idea of the thrift industry will fade into memory. Most of these are very small institutions, not unlike the smaller commercial banks listed above with very few employees.
I go through this list because many of the problems that now exist within the banking system are concentrated in these smaller institutions, formerly the heart-beat of Main Street America. In the last fifty years the financial environment changed substantially and a large number of these depository institutions were just not able to make the transition. We are going through the final stages of the current restructuring of the banking industry. What we will see in the next five to seven years will be difficult to compare with what existed in the last half of the twentieth century.
What changed? Well, the inflation of the 1960s and 1970s brought about higher and higher short term interest rates. For many institutions, the comfortable interest rate spreads the banks and thrifts worked with disappeared and even went negative in some instances. The government’s response was to open up the balance sheets and allow these institutions to diversify and create more services that could earn fee income. Also, new financial instruments were created to allow these depository institutions to get into more exotic types of investments.
A typical situation was one in which a depository institution had only 15 people or less with most of them being tellers or clerks and only two or possibly three that had executive authority. Most of these employees had been with the institutions for a decade or more. These institutions were flooded with investment bankers and others with all kinds of sophisticated ideas about how a $50 million organization could get into high-yielding assets or buy cheap deposits or do many other very innovative things so as to regain profitability. The late 1970s and 1980s are full of stories about how the managements of small institutions were “educated” in the ways of Wall Street. The thrift crisis resulted.
In the 1990s and 2000s even more sophisticated instruments and opportunities were brought to the smaller institutions that thought they were getting good advice to help them operate in the twenty-first century. Part of what the managements got into was commercial real estate deals. This is what Elizabeth Warren has alerted us to. But, there are many, many other institutions that have securities or other assets on their balance sheets that are not performing or are damaged in one way or another.
What is Ms. Warren talking about when it comes to the magnitude of the problem? Is she talking about a 20% write down of some assets? A 25% write down? Do these “small” banks have sufficient capital to take such a write down? Can these small banks raise sufficient new capital to cover such a write down?
Can the banking industry handle another 40% decline in the number of banks in the system? Can the banking industry absorb this contraction in the next three to five years not in 18 years? This would mean a loss of more than three thousand commercial banks and savings institutions in this time period.
This is the environment that the Fed, the FDIC, and the Treasury Department is currently working within. They have not really let us know how serious the problem is. Elizabeth Warren has perhaps given us more information than others within the government would like us to have. Maybe this straight talking is why many people are reluctant to put her in charge of a government agency. She might tell us what is really going on.
Whatever, it just looks as if the banking system has a long way to go in order to regain its health.
Tuesday, July 13, 2010
So Long to the Savings and Loan Association
Well, the final nail is being hammered into the coffin. The Savings and Loan industry is going to be “legacy”…and, rightfully so.
The New York Times writes the obituary: “Financial Bill to Close Regulator of Fading Industry,” http://www.nytimes.com/2010/07/14/business/14thrift.html?_r=1&hp. “The most remarkable piece of the financial regulation bill that Democrats hope to send the president this week is the directive to dismember and close the Office of Thrift Supervision. The decision is all the more remarkable because it cuts against the grain of a bill devoted to expanding federal regulation, and because it has had virtually no opposition, save for the obligatory protests of the agency’s senior management.”
The original Savings and Loan Association was created to help Americans own their own homes. The S&Ls deposits were time and savings accounts, no transaction accounts, and the assets of an association were mortgages. An S&L could hold 80% of its assets of more in mortgages…not mortgage-backed securities or any other type of synthetic concoction of mortgage instruments or derivatives. These were the single family mortgages of individual families, most of them known personally by the people who ran the association.
Furthermore, these financial organizations were mutual institutions. That is, they were owned by their depositors. No stock holders, no maximizing shareholder value, no gimmicks, no nothing. By law they took time and savings deposits and, by law, they originated mortgages to hold on their balance sheets.
How did they make money? Well, for much of their history they paid 1 ½% to 2% interest on their deposits and collected 4% or so on their mortgages. Their expenses were extremely low. In a typical institution there were only one or possibly two managers (men) and a clerk and maybe two or three tellers or a receptionist (all women). They were mutual institutions so that they did not have to earn anything like 15% on paid-in equity. A 1% return on assets was really good and it just went into the surplus account anyway. Remember George Bailey (Jimmy Stewart), the Bailey Building and Loan Association and the movie “It’s A Wonderful Life.”
The demise of the industry is just another example of how much inflation can be the “stealth” destroyer of stability. The health of the industry was dependent upon the interest rate spread presented above. And, in non-inflationary times when interest rates remained relatively stable, the S&Ls could prosper because the interest rate spread they earned paid for expenses and added to the association’s surplus.
There were cyclical problems, but regulators, specifically using Regulation Q (Reg Q), put a lid on the rate that these institutions could pay depositors so that a positive interest rate spread could be maintained although this “lid” caused something called “dis-intermediation”, an outflow of deposits, that put pressure on the liquidity of associations. This disintermediation was just a time period these institutions had to go through until interest rates stabilized once again.
However, this disintermediation problem points up the underlying weakness of the Savings and Loan Industry. The industry was built on the foundation of interest rate risk: the assets of the typical Savings and Loan Association had an effective average maturity of twelve or thirteen years. The deposits had a maturity of…well, they were very short term deposits.
The periodic problem of disintermediation pointed up the underlying risk that existed within the industry. However, the inflation of the 1960s basically killed the industry. As inflation rose toward the end of the decade, interest rates rose as inflationary expectations got built into the term structure. That is, interest rates, both long-term and short-term, rose.
Well, the typical S&L saw the cost of deposits rise by a substantial amount almost across the board while the return they earned on their assets rose only modestly. All of a sudden, thrift institutions were faced with negative interest rates spreads and they could not exist in such an environment.
This is when deregulation started and accelerated dramatically through the 1970s. Basically, the idea of a thrift institution was dead by then. Not only did regulators allow balance sheets to become more like commercial banks, bank executives were drawn into the industry to run the thrifts. And, of course, thrift institutions were allowed to shed their “mutual” charter and become stock institutions. I took one thrift institution public in 1985 and ran another thrift that had just gone public in 1987.
I have spent a lot of time over the past two years writing about how inflation in the United States over the past 50 years or so basically undermined the financial system as it was known, created a tremendous environment for financial innovation, and helped to change the makeup of American society, where employment in financial services reached 40% or more of the workforce when, before 1980, employment in financial services had never exceeded 15% of the workforce.
The inflation created by the federal government since January 1961 forced the collapse of the post-World War II international financial system as the United States took itself off the gold standard on August 15, 1971 and floated the United States dollar. The inflation of the 1960s resulted in the rise in interest rates that destroyed the foundation of the thrift industry in the United States and created the conditions that led to the Savings and Loan crisis of the late 1980s and early 1990s. The continued inflation of the late 20th century led to the stock market bubble in the 1990s (the dot.com boom), the demise of the Glass-Steagall Act, and the asset bubble (both in the stock market and housing) of the 2000s.
The difficulties we have been experiencing in the last few years can also be traced back to the inflation of the past fifty years. Yet, inflation is sneaky and people tend to forget it in pointing their fingers at the “bastards” that “caused” the financial collapse.
The economist Irving Fisher captured this situation in his book titled “Inflation”: “If it is inflation and the one who profits is the business man, the workman calls the profiter a ‘profiteer.’ The underdog reasons as follows: ‘How did I get poor while you got rich? You did it, you dirty thief. I don’t know just how you did it; your ways are too subtle, sinister, dark and underground for simple me; but you did it all the same’
But, none of us—neither the farmer, nor the workman, nor the bondholder, nor the stockholder—thinks of blaming the dollar. So the real culprit stands on the curbstone watching us poor mortals as we beat out each other’s brains, and has the last laugh.” (This was written in 1933.)
So, good-bye to the Savings and Loan Industry. You did America well. But, your time is past. Rest In Peace (RIP).
The New York Times writes the obituary: “Financial Bill to Close Regulator of Fading Industry,” http://www.nytimes.com/2010/07/14/business/14thrift.html?_r=1&hp. “The most remarkable piece of the financial regulation bill that Democrats hope to send the president this week is the directive to dismember and close the Office of Thrift Supervision. The decision is all the more remarkable because it cuts against the grain of a bill devoted to expanding federal regulation, and because it has had virtually no opposition, save for the obligatory protests of the agency’s senior management.”
The original Savings and Loan Association was created to help Americans own their own homes. The S&Ls deposits were time and savings accounts, no transaction accounts, and the assets of an association were mortgages. An S&L could hold 80% of its assets of more in mortgages…not mortgage-backed securities or any other type of synthetic concoction of mortgage instruments or derivatives. These were the single family mortgages of individual families, most of them known personally by the people who ran the association.
Furthermore, these financial organizations were mutual institutions. That is, they were owned by their depositors. No stock holders, no maximizing shareholder value, no gimmicks, no nothing. By law they took time and savings deposits and, by law, they originated mortgages to hold on their balance sheets.
How did they make money? Well, for much of their history they paid 1 ½% to 2% interest on their deposits and collected 4% or so on their mortgages. Their expenses were extremely low. In a typical institution there were only one or possibly two managers (men) and a clerk and maybe two or three tellers or a receptionist (all women). They were mutual institutions so that they did not have to earn anything like 15% on paid-in equity. A 1% return on assets was really good and it just went into the surplus account anyway. Remember George Bailey (Jimmy Stewart), the Bailey Building and Loan Association and the movie “It’s A Wonderful Life.”
The demise of the industry is just another example of how much inflation can be the “stealth” destroyer of stability. The health of the industry was dependent upon the interest rate spread presented above. And, in non-inflationary times when interest rates remained relatively stable, the S&Ls could prosper because the interest rate spread they earned paid for expenses and added to the association’s surplus.
There were cyclical problems, but regulators, specifically using Regulation Q (Reg Q), put a lid on the rate that these institutions could pay depositors so that a positive interest rate spread could be maintained although this “lid” caused something called “dis-intermediation”, an outflow of deposits, that put pressure on the liquidity of associations. This disintermediation was just a time period these institutions had to go through until interest rates stabilized once again.
However, this disintermediation problem points up the underlying weakness of the Savings and Loan Industry. The industry was built on the foundation of interest rate risk: the assets of the typical Savings and Loan Association had an effective average maturity of twelve or thirteen years. The deposits had a maturity of…well, they were very short term deposits.
The periodic problem of disintermediation pointed up the underlying risk that existed within the industry. However, the inflation of the 1960s basically killed the industry. As inflation rose toward the end of the decade, interest rates rose as inflationary expectations got built into the term structure. That is, interest rates, both long-term and short-term, rose.
Well, the typical S&L saw the cost of deposits rise by a substantial amount almost across the board while the return they earned on their assets rose only modestly. All of a sudden, thrift institutions were faced with negative interest rates spreads and they could not exist in such an environment.
This is when deregulation started and accelerated dramatically through the 1970s. Basically, the idea of a thrift institution was dead by then. Not only did regulators allow balance sheets to become more like commercial banks, bank executives were drawn into the industry to run the thrifts. And, of course, thrift institutions were allowed to shed their “mutual” charter and become stock institutions. I took one thrift institution public in 1985 and ran another thrift that had just gone public in 1987.
I have spent a lot of time over the past two years writing about how inflation in the United States over the past 50 years or so basically undermined the financial system as it was known, created a tremendous environment for financial innovation, and helped to change the makeup of American society, where employment in financial services reached 40% or more of the workforce when, before 1980, employment in financial services had never exceeded 15% of the workforce.
The inflation created by the federal government since January 1961 forced the collapse of the post-World War II international financial system as the United States took itself off the gold standard on August 15, 1971 and floated the United States dollar. The inflation of the 1960s resulted in the rise in interest rates that destroyed the foundation of the thrift industry in the United States and created the conditions that led to the Savings and Loan crisis of the late 1980s and early 1990s. The continued inflation of the late 20th century led to the stock market bubble in the 1990s (the dot.com boom), the demise of the Glass-Steagall Act, and the asset bubble (both in the stock market and housing) of the 2000s.
The difficulties we have been experiencing in the last few years can also be traced back to the inflation of the past fifty years. Yet, inflation is sneaky and people tend to forget it in pointing their fingers at the “bastards” that “caused” the financial collapse.
The economist Irving Fisher captured this situation in his book titled “Inflation”: “If it is inflation and the one who profits is the business man, the workman calls the profiter a ‘profiteer.’ The underdog reasons as follows: ‘How did I get poor while you got rich? You did it, you dirty thief. I don’t know just how you did it; your ways are too subtle, sinister, dark and underground for simple me; but you did it all the same’
But, none of us—neither the farmer, nor the workman, nor the bondholder, nor the stockholder—thinks of blaming the dollar. So the real culprit stands on the curbstone watching us poor mortals as we beat out each other’s brains, and has the last laugh.” (This was written in 1933.)
So, good-bye to the Savings and Loan Industry. You did America well. But, your time is past. Rest In Peace (RIP).
Monday, February 15, 2010
Economy Still Seeks Liquidity, but Move Slows Down
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.
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.
Monday, January 18, 2010
A Look At The Monetary Aggregates
The growth of the monetary aggregates has slowed significantly in recent months. This, of course, does not mean that the significant concerns over the $1.0 trillion in excess reserves in the banking system have evaporated. By no means!
Looking at the monetary aggregates does provide us with vital information about what economic units are doing with their assets. We took a look at this in an earlier post last November: http://seekingalpha.com/article/175766-how-people-are-using-their-money-and-what-it-says-about-the-economy. At that earlier time, it was obvious that people were moving their assets into transaction accounts and shorter maturity deposits. Also, people were moving money from thrift institutions into commercial banks.
This general movement of wealth can be called “bearish”. That is, when people lack confidence in the economy and in the future, they move into cash and other very liquid assets.
The December year-over-year rate of increase of the currency held outside the banking system stands at 5.7%. This is right in line with the growth rate of M1, the narrow measure of the money stock, which was 5.9% in December.
These growth rates are the lowest to be achieved in 2009. As I shall argue, this is not a sign that “bearishness” is over, just that it lessened throughout the year.
The August year-over-year growth rate for currency was 10.5% and for October 8.3%. The similar measures for the M1 measure of the money stock were 18.5% and 13.4%, respectively. Thus, the move into these assets have slowed, measurably.
There is still strong information that economic units are moving funds from time and savings accounts into transaction accounts. The December year-over-year growth rate of non-M1 accounts, primarily time and savings deposits, was 2.4%, substantially below the growth rate of Demand Deposits and other Checkable Deposits which stood at 6.3%.
The movement here also indicates that the movement from thrift institutions to commercial banks remained strong. For example, the year-over-year rate of growth of Thrift Deposits was 1.7% and this included an increase of Checkable Deposits at thrift institutions of 13.1%. The thrift industry is still really suffering.
Add to this the fact that the 1.7% figure includes deposits at Credit Unions, which are rising significantly, strengthens the argument that the traditional thrift industry continues to suffer badly!
Additional evidence of the move into very liquid assets is the fact that the amount of money placed in Retail Money Funds dropped almost 26%, year-over-year, and the money placed in Institutional Money Funds fell by 8.0%, year-over-year.
People continue to be afraid of the future, and, as a consequence they remain very bearish in terms of how they are managing their assets.
This leads to the conclusion that the basic positive movements in financial markets, in the stock market and in the bond market, almost all come from institutional trading. And, this “good” performance is coming from the interest rate subsidy that the Federal Reserve is providing to the banking system and the financial markets.
The increase in transaction accounts in the banking system has meant that the required reserves of the banking system have increased. The December year-over-year rate of increase of required reserves in the banking system was 18.5%.
To cover this, the Federal Reserve, continuing to err on the side of providing too many reserves, increased the monetary base by 22.0% over the same period of time. As a result, excess reserves rose by 40%.
The banking system still tells us a lot about what is happening within the economy. It tells us what the banks, themselves, are doing. It tells us how people are allocating their assets. It provides us with a gauge about the bullishness or bearishness of economic units. It also gives us some information on how the different sectors of the banking industry, big banks, small- and medium-sized banks, and thrift institutions are doing.
Looking at the monetary aggregates does provide us with vital information about what economic units are doing with their assets. We took a look at this in an earlier post last November: http://seekingalpha.com/article/175766-how-people-are-using-their-money-and-what-it-says-about-the-economy. At that earlier time, it was obvious that people were moving their assets into transaction accounts and shorter maturity deposits. Also, people were moving money from thrift institutions into commercial banks.
This general movement of wealth can be called “bearish”. That is, when people lack confidence in the economy and in the future, they move into cash and other very liquid assets.
The December year-over-year rate of increase of the currency held outside the banking system stands at 5.7%. This is right in line with the growth rate of M1, the narrow measure of the money stock, which was 5.9% in December.
These growth rates are the lowest to be achieved in 2009. As I shall argue, this is not a sign that “bearishness” is over, just that it lessened throughout the year.
The August year-over-year growth rate for currency was 10.5% and for October 8.3%. The similar measures for the M1 measure of the money stock were 18.5% and 13.4%, respectively. Thus, the move into these assets have slowed, measurably.
There is still strong information that economic units are moving funds from time and savings accounts into transaction accounts. The December year-over-year growth rate of non-M1 accounts, primarily time and savings deposits, was 2.4%, substantially below the growth rate of Demand Deposits and other Checkable Deposits which stood at 6.3%.
The movement here also indicates that the movement from thrift institutions to commercial banks remained strong. For example, the year-over-year rate of growth of Thrift Deposits was 1.7% and this included an increase of Checkable Deposits at thrift institutions of 13.1%. The thrift industry is still really suffering.
Add to this the fact that the 1.7% figure includes deposits at Credit Unions, which are rising significantly, strengthens the argument that the traditional thrift industry continues to suffer badly!
Additional evidence of the move into very liquid assets is the fact that the amount of money placed in Retail Money Funds dropped almost 26%, year-over-year, and the money placed in Institutional Money Funds fell by 8.0%, year-over-year.
People continue to be afraid of the future, and, as a consequence they remain very bearish in terms of how they are managing their assets.
This leads to the conclusion that the basic positive movements in financial markets, in the stock market and in the bond market, almost all come from institutional trading. And, this “good” performance is coming from the interest rate subsidy that the Federal Reserve is providing to the banking system and the financial markets.
The increase in transaction accounts in the banking system has meant that the required reserves of the banking system have increased. The December year-over-year rate of increase of required reserves in the banking system was 18.5%.
To cover this, the Federal Reserve, continuing to err on the side of providing too many reserves, increased the monetary base by 22.0% over the same period of time. As a result, excess reserves rose by 40%.
The banking system still tells us a lot about what is happening within the economy. It tells us what the banks, themselves, are doing. It tells us how people are allocating their assets. It provides us with a gauge about the bullishness or bearishness of economic units. It also gives us some information on how the different sectors of the banking industry, big banks, small- and medium-sized banks, and thrift institutions are doing.
The scorecard:
- People are still moving their money from savings accounts to transaction accounts;
- Commercial banks, in general, are not lending;
- Economic units are, by-and-large, still very bearish;
- Big banks are doing very, very well;
- Small- and medium-sized banks are still on the edge;
- And, thrift institutions are really suffering.
One doesn’t see much of a recovery captured in these results.
Monday, November 30, 2009
How People are using their Money
It is instructive to take a closer look at how people seem to be handling their money. Obviously, people are not spending much, although the Federal Reserve sure cannot be faulted for not trying to jump start consumer and business spending. The monetary base, the sum of all bank reserves and money that can serve as bank reserves has gone from a year-over-year rate of increase of about one percent at the end of 2007, to a 101%, year-over-year, rate of increase at the end of 2008, to a 102%, year-over-year, rate of increase through the third quarter of 2009.
The unwillingness of banks to lend and/or the unwillingness of people to borrow shows up in how fast this base money turns over in the economy, that is, in the velocity of use of this base money. Whereas, velocity was increasing by about 4% through 2007, it declined by 101% in 2008, and was declining at a 104% rate through the third quarter of 2009.
The consequence of this was a build-up in excess reserves in the banking system. For a current review of this result see the column of Peter Eavis, “The U. S. Economy’s $1 Trillion Question”, in the Wall Street Journal (http://online.wsj.com/article/SB20001424052748703300504574565991276510968.html#mod=todays_us_money_and_investing).
If we look at broader measures of the money stock, we see similar results, but with some interesting shifts between money stock measures. The year-over-year rate of growth in the M1 measure of the money stock was roughly flat through the end of 2007, about 16% at the end of 2008, and approximately 19% through the third quarter of 2009. The turn-over, or, velocity, of the M1 money stock increased by about 5% in the earlier period, but fell by 16% through the year of 2008 and by 20% through the first three quarters of 2009.
The M2 measure of the money stock grew at a 6% year-over-year rate of increase in 2007, a 10% growth in 2008 and an 8% rise through the first three quarters of 2009. The velocity of the M2 money stock was roughly constant in 2007, but fell at annual rates of about 10% in both 2008 and through the first three quarters of 2009.
The difference in the performance of the M1 and M2 money stock measures tell of something very interesting in terms of how people are handling their money, but, it does not tell us much about how banks are lending because all measures of bank lending have been declining throughout the summer and fall months of 2009.
First of all, people have demanded more and more currency, a symbol of not only a move to security, but also an indication that people are paying for more of the things that they are buying with cash. The year-over-year rate of increase in currency outside of the banks was relatively flat through all of 2007 and through August 2008. In September 2008, however, the currency component of the money stock began to increase and was rising in the range of 10% to 11% by the end of 2008 through the September of 2009.
The other interesting thing about the growth of the M1 measure of the money stock was the rise in demand deposits at commercial banks. These are primarily “transactions” balances and serve much the same purpose as currency, reflecting the need to keep funds available for cash purposes. Also, people seem to feel more secure with funds in checking accounts than in other forms of bank accounts.
Demand deposits at commercial banks were actually decreasing all through 2007 and through the summer of 2008. In September 2008, the year-over-year the growth rate dramatically turned positive (16%) and then rose to a 54% rate of increase by December of that year. Demand deposits continued to grow at a 30% to 40% annual rate through most of 2009, falling off to about a 20% rate of increase in September and October 2009.
The interesting thing about this movement is where it is coming from. Primarily the movement into currency and demand deposits is coming from thrift institutions and retail money funds. The growth in savings deposits and small time deposits at thrift institutions turned negative in 2008, although the latter actually started to decline in late 2007. Since October 2008, the year-over-year rate of change of savings deposits at thrift institutions decline in the 7% to 9% range and the rate of decline in small time deposits at thrift institutions was in the teens for most of late 2008 before reaching 20% in the fall of 2009.
The biggest turnaround came in retail money funds. In late 2007 and through July 2008, the year-over-year rate of growth of money in retail money funds was in the 25% range. However, by the end of 2008, the increase was less than 10% and in March 2009, money was actually leaving these funds! In September 2009, the year-over-year rate of decline in these funds was over 16% and dropped further to -22% in October.
The bottom line of all this activity is that people have moved a massive amount of funds from time and savings accounts to demand deposits and currency. They have also moved massive amounts of funds from thrift institutions and retail money funds into commercial banks. There appear to be two main motives for this movement. The first is for people to have access to their funds for spending and to avoid the use of credit, if possible. The second is for people to feel that their funds are safer.
The consequences of this movement of funds are that the growth rate of the M1 money stock rapidly accelerated while the rate of increase of the M2 money stock only increased modestly. In recent weeks, however, the growth rates of both measures of the money stock have been slowing. Hopefully, this is a sign that fewer and fewer people are moving their funds into assets for use in transactions.
The next thing we need to look for in this area is a movement out of these “transaction” assets and back into time and savings accounts. It may take several more months for this to happen. When this movement begins we can gain greater confidence that people are feeling better about their financial circumstances and that the economy is, in fact, recovering.
Just a little aside on regulatory issues: A suggestion for restructuring the banking industry and its regulatory agencies would be to completely eliminate thrift institutions and the regulatory agencies overseeing thrift institutions and allow those thrifts that now exist the choice of either becoming a commercial bank or becoming a credit union.
The unwillingness of banks to lend and/or the unwillingness of people to borrow shows up in how fast this base money turns over in the economy, that is, in the velocity of use of this base money. Whereas, velocity was increasing by about 4% through 2007, it declined by 101% in 2008, and was declining at a 104% rate through the third quarter of 2009.
The consequence of this was a build-up in excess reserves in the banking system. For a current review of this result see the column of Peter Eavis, “The U. S. Economy’s $1 Trillion Question”, in the Wall Street Journal (http://online.wsj.com/article/SB20001424052748703300504574565991276510968.html#mod=todays_us_money_and_investing).
If we look at broader measures of the money stock, we see similar results, but with some interesting shifts between money stock measures. The year-over-year rate of growth in the M1 measure of the money stock was roughly flat through the end of 2007, about 16% at the end of 2008, and approximately 19% through the third quarter of 2009. The turn-over, or, velocity, of the M1 money stock increased by about 5% in the earlier period, but fell by 16% through the year of 2008 and by 20% through the first three quarters of 2009.
The M2 measure of the money stock grew at a 6% year-over-year rate of increase in 2007, a 10% growth in 2008 and an 8% rise through the first three quarters of 2009. The velocity of the M2 money stock was roughly constant in 2007, but fell at annual rates of about 10% in both 2008 and through the first three quarters of 2009.
The difference in the performance of the M1 and M2 money stock measures tell of something very interesting in terms of how people are handling their money, but, it does not tell us much about how banks are lending because all measures of bank lending have been declining throughout the summer and fall months of 2009.
First of all, people have demanded more and more currency, a symbol of not only a move to security, but also an indication that people are paying for more of the things that they are buying with cash. The year-over-year rate of increase in currency outside of the banks was relatively flat through all of 2007 and through August 2008. In September 2008, however, the currency component of the money stock began to increase and was rising in the range of 10% to 11% by the end of 2008 through the September of 2009.
The other interesting thing about the growth of the M1 measure of the money stock was the rise in demand deposits at commercial banks. These are primarily “transactions” balances and serve much the same purpose as currency, reflecting the need to keep funds available for cash purposes. Also, people seem to feel more secure with funds in checking accounts than in other forms of bank accounts.
Demand deposits at commercial banks were actually decreasing all through 2007 and through the summer of 2008. In September 2008, the year-over-year the growth rate dramatically turned positive (16%) and then rose to a 54% rate of increase by December of that year. Demand deposits continued to grow at a 30% to 40% annual rate through most of 2009, falling off to about a 20% rate of increase in September and October 2009.
The interesting thing about this movement is where it is coming from. Primarily the movement into currency and demand deposits is coming from thrift institutions and retail money funds. The growth in savings deposits and small time deposits at thrift institutions turned negative in 2008, although the latter actually started to decline in late 2007. Since October 2008, the year-over-year rate of change of savings deposits at thrift institutions decline in the 7% to 9% range and the rate of decline in small time deposits at thrift institutions was in the teens for most of late 2008 before reaching 20% in the fall of 2009.
The biggest turnaround came in retail money funds. In late 2007 and through July 2008, the year-over-year rate of growth of money in retail money funds was in the 25% range. However, by the end of 2008, the increase was less than 10% and in March 2009, money was actually leaving these funds! In September 2009, the year-over-year rate of decline in these funds was over 16% and dropped further to -22% in October.
The bottom line of all this activity is that people have moved a massive amount of funds from time and savings accounts to demand deposits and currency. They have also moved massive amounts of funds from thrift institutions and retail money funds into commercial banks. There appear to be two main motives for this movement. The first is for people to have access to their funds for spending and to avoid the use of credit, if possible. The second is for people to feel that their funds are safer.
The consequences of this movement of funds are that the growth rate of the M1 money stock rapidly accelerated while the rate of increase of the M2 money stock only increased modestly. In recent weeks, however, the growth rates of both measures of the money stock have been slowing. Hopefully, this is a sign that fewer and fewer people are moving their funds into assets for use in transactions.
The next thing we need to look for in this area is a movement out of these “transaction” assets and back into time and savings accounts. It may take several more months for this to happen. When this movement begins we can gain greater confidence that people are feeling better about their financial circumstances and that the economy is, in fact, recovering.
Just a little aside on regulatory issues: A suggestion for restructuring the banking industry and its regulatory agencies would be to completely eliminate thrift institutions and the regulatory agencies overseeing thrift institutions and allow those thrifts that now exist the choice of either becoming a commercial bank or becoming a credit union.
Thursday, October 1, 2009
The Problems of the Savings Industry
In an earlier post I reported that the weakness being experienced in the year-over-year rate of growth of the M2 measure of the money stock could be attributed to shifts in deposits from thrift institutions into commercial banks. (September 25: http://seekingalpha.com/article/163456-thrift-struggles-dragging-down-m2-growth.)
On Tuesday, September 29, I wrote about commercial banks and how bank holding companies had raised a substantial amount of funds in the capital markets from the second quarter of 2008 to the second quarter of 2009 but most of the funds raised by these institutions went into non-bank subsidiaries. Chartered U. S. banks saw some increase in assets over this time period but these funds went into cash assets, government or agency securities, and mortgages, mostly of the commercial type.
We also have data from the flow-of-funds accounts that give us some insight into what is happening at savings institutions and credit unions. The real success story seems to be that connected with credit unions. The credit union industry ended the second quarter of 2008 with almost $900 billion in financial assets. All other savings institutions had assets of about $1,400 billion and the Office of Thrift Supervision (OTS) reported that thrift institutions had assets that amounted to only $1,100 at the end of the second quarter.
Who would have ever thought that the credit union industry would ever be about the same size as the thrift industry?
Credit Unions grew by $73 billion, year-over-year, and the credit that they extended seemed to expand during this time period at a fairly steady pace.
The bad news: savings institutions, which include savings and loan associations, mutual savings banks, and federal savings banks, performed abysmally. For one, industry assets, according to the OTS fell by 27% over the last year, reflecting the failure and sale (to commercial banks) of several large thrift institutions. Total loans at these institutions fell by 35%.
The total decline in financial assets for the industry was $420 billion: the mortgage portfolio of the industry declined by almost a third or $360 billion. Consumer credit also declined by about $14 billion.
According to the OTS, the industry as a whole earned a profit of $4 million—yes, that’s million—in the second quarter. This is the first quarterly profit since the third quarter of 2007.
The industry added almost $5.0 billion—yes, that’s billion—to loan loss provisions in the second quarter. This loan loss provision was exceeded in history by only five other quarters. However, these five other quarters were the five quarters just preceding the second quarter of 2009.
The OTS reports, however, that “96.2% of all thrifts exceed ‘well-capitalized’ regulatory standards.” These institutions, we are told comprise 95.9% of industry assets but most of them are relatively small. So, institutions with approximately $45 billion in assets are in not “well-capitalized” thrifts, by industry standards. The number of problem thrifts reached 40 at the end of the second quarter.
Yet the industry has about $40 in what are called troubled assets, about 3.5% of Total Assets. Troubled assets are noncurrent loans and reposed assets.
It seems as if the thrift industry is dying and needs to be consolidated and merged into the commercial banking industry. (And this from a person, myself, who successfully turned around two thrift institutions.) I don’t believe that there should be a merger of thrift institutions with the credit union segment of the industry. Credit unions seem to be doing something right. (I have worked, in recent years, with groups to form three credit unions and I believe that credit unions can fill a very important gap in consumer finance, credit and banking services.)
The thrift industry played a very important role in the history of the United States (and elsewhere in the world). In the current era of securitization and financial innovation, I believe that savings institutions have exceeded their useful lifetime. The savings and loan crisis saw the collapse of the industry and the 2000s just verified that the industry really needs to continue to shrink and become incorporated into other segments of the market.
On Tuesday, September 29, I wrote about commercial banks and how bank holding companies had raised a substantial amount of funds in the capital markets from the second quarter of 2008 to the second quarter of 2009 but most of the funds raised by these institutions went into non-bank subsidiaries. Chartered U. S. banks saw some increase in assets over this time period but these funds went into cash assets, government or agency securities, and mortgages, mostly of the commercial type.
We also have data from the flow-of-funds accounts that give us some insight into what is happening at savings institutions and credit unions. The real success story seems to be that connected with credit unions. The credit union industry ended the second quarter of 2008 with almost $900 billion in financial assets. All other savings institutions had assets of about $1,400 billion and the Office of Thrift Supervision (OTS) reported that thrift institutions had assets that amounted to only $1,100 at the end of the second quarter.
Who would have ever thought that the credit union industry would ever be about the same size as the thrift industry?
Credit Unions grew by $73 billion, year-over-year, and the credit that they extended seemed to expand during this time period at a fairly steady pace.
The bad news: savings institutions, which include savings and loan associations, mutual savings banks, and federal savings banks, performed abysmally. For one, industry assets, according to the OTS fell by 27% over the last year, reflecting the failure and sale (to commercial banks) of several large thrift institutions. Total loans at these institutions fell by 35%.
The total decline in financial assets for the industry was $420 billion: the mortgage portfolio of the industry declined by almost a third or $360 billion. Consumer credit also declined by about $14 billion.
According to the OTS, the industry as a whole earned a profit of $4 million—yes, that’s million—in the second quarter. This is the first quarterly profit since the third quarter of 2007.
The industry added almost $5.0 billion—yes, that’s billion—to loan loss provisions in the second quarter. This loan loss provision was exceeded in history by only five other quarters. However, these five other quarters were the five quarters just preceding the second quarter of 2009.
The OTS reports, however, that “96.2% of all thrifts exceed ‘well-capitalized’ regulatory standards.” These institutions, we are told comprise 95.9% of industry assets but most of them are relatively small. So, institutions with approximately $45 billion in assets are in not “well-capitalized” thrifts, by industry standards. The number of problem thrifts reached 40 at the end of the second quarter.
Yet the industry has about $40 in what are called troubled assets, about 3.5% of Total Assets. Troubled assets are noncurrent loans and reposed assets.
It seems as if the thrift industry is dying and needs to be consolidated and merged into the commercial banking industry. (And this from a person, myself, who successfully turned around two thrift institutions.) I don’t believe that there should be a merger of thrift institutions with the credit union segment of the industry. Credit unions seem to be doing something right. (I have worked, in recent years, with groups to form three credit unions and I believe that credit unions can fill a very important gap in consumer finance, credit and banking services.)
The thrift industry played a very important role in the history of the United States (and elsewhere in the world). In the current era of securitization and financial innovation, I believe that savings institutions have exceeded their useful lifetime. The savings and loan crisis saw the collapse of the industry and the 2000s just verified that the industry really needs to continue to shrink and become incorporated into other segments of the market.
Friday, September 25, 2009
Reasons for the slowdown in M2 growth: A Thrift Industry Crisis?
A surprisingly large amount of attention has recently been given to the slowdown in the growth rate of the M2 measure of the money stock. Around the first of the year, the year-over-year rate of growth of the M2 money stock was around 10%, a healthy rate of increase given the recession and the stance of quantitative easing on the part of the Federal Reserve.
Now, the year-over-year rate of growth in the M2 money stock measure has dropped below 8% and concern has been raised about the weakness in this particular indicator of the effectiveness of monetary policy. The question this weakness raises concerns the ability of the Federal Reserve to influence the real economy and the fact that the economy remains very, very weak.
The reason for this weakness, I believe, has less to do with the effectiveness of the Fed’s monetary policy and more to do with the shift in funds within the financial system. For one, the year-over-year rate of increase in the M1 money stock continues to be quite high, averaging more than 18% in the past month or two.
Whereas the M1 money stock increased about $260 billion over the past year, the M2 measure rose by $600 billion. Thus, the increase in the non-M1 part of the M2 measure was approximately $340 billion. The difference in growth rates for the aggregate measure obviously comes because the base for the M2 growth is much larger than the base for the M1 growth.
But, another interesting shift has occurred within these figures. Some deposit levels within the
non-M1 part of the M2 measure have actually declined over the past year. Note where the declines came: they came in time and savings deposits at thrift institutions and in retail money funds.
People are taking their money out of thrift institutions and money funds and putting them into deposits at commercial banks!
Time and savings deposits at thrift institutions fell about $130 billion over the past year and retail money funds dropped by almost $160 billion.
Note that time and savings deposits at commercial banks rose by $625 billion during the same time period.
This movement is reinforced by the shift in “other checkable deposits” over the past year. Other checkable deposits at commercial banks rose by about $50 billion whereas the same type of accounts at thrift institutions remained roughly the same. (Demand deposits at commercial banks increased by about $125 billion over the same time period.)
If one looks at the flow-of-funds accounts, the total financial assets at savings institutions dropped by about $420 billion from the second quarter in 2008 to the second quarter in 2009. Deposits at these institutions dropped by almost $200 billion and credit market instruments (supplying funds to these institutions) fell by about $280 billion.
What we seem to be observing is a massive withdrawal of funds from the thrift sector! This, I would suggest, is not a result of the monetary stance of the Federal Reserve System.
Very little attention has been given to the thrift industry over the past year. Maybe some more attention should be directed to the problems being faced by this industry.
Now, the year-over-year rate of growth in the M2 money stock measure has dropped below 8% and concern has been raised about the weakness in this particular indicator of the effectiveness of monetary policy. The question this weakness raises concerns the ability of the Federal Reserve to influence the real economy and the fact that the economy remains very, very weak.
The reason for this weakness, I believe, has less to do with the effectiveness of the Fed’s monetary policy and more to do with the shift in funds within the financial system. For one, the year-over-year rate of increase in the M1 money stock continues to be quite high, averaging more than 18% in the past month or two.
Whereas the M1 money stock increased about $260 billion over the past year, the M2 measure rose by $600 billion. Thus, the increase in the non-M1 part of the M2 measure was approximately $340 billion. The difference in growth rates for the aggregate measure obviously comes because the base for the M2 growth is much larger than the base for the M1 growth.
But, another interesting shift has occurred within these figures. Some deposit levels within the
non-M1 part of the M2 measure have actually declined over the past year. Note where the declines came: they came in time and savings deposits at thrift institutions and in retail money funds.
People are taking their money out of thrift institutions and money funds and putting them into deposits at commercial banks!
Time and savings deposits at thrift institutions fell about $130 billion over the past year and retail money funds dropped by almost $160 billion.
Note that time and savings deposits at commercial banks rose by $625 billion during the same time period.
This movement is reinforced by the shift in “other checkable deposits” over the past year. Other checkable deposits at commercial banks rose by about $50 billion whereas the same type of accounts at thrift institutions remained roughly the same. (Demand deposits at commercial banks increased by about $125 billion over the same time period.)
If one looks at the flow-of-funds accounts, the total financial assets at savings institutions dropped by about $420 billion from the second quarter in 2008 to the second quarter in 2009. Deposits at these institutions dropped by almost $200 billion and credit market instruments (supplying funds to these institutions) fell by about $280 billion.
What we seem to be observing is a massive withdrawal of funds from the thrift sector! This, I would suggest, is not a result of the monetary stance of the Federal Reserve System.
Very little attention has been given to the thrift industry over the past year. Maybe some more attention should be directed to the problems being faced by this industry.
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