Banking Problems
More than 150 in public traded US banks own nonperforming loans that equal five p.c or more of their holdings, a level that previous regulators say can wipe out a bank’s equity and threaten its survival.
And Bloomberg seems to have recognized the key issue with these banks ( all of which should have been shut over twelve months gone. Excluding the stress-test list, banks with nonperformers above five % had mixed deposits of $193 bn., according to Bloomberg information. That is just about 15 times the scale of the FDIC’s deposit insurance fund at the end of the first quarter.
But the genuine problem is regulatory malfeasance. See, the point of the Tier Capital Proportion is to let the governing body ( FDIC ) to come in thru the OTS or OCC before the regulatory capital cushion is wholly used, and if the law is basically followed and folks actually do their roles, there’s no loss to the repository insurance fund.
That is, while a bank’s assets can be sold ( in total ) for at least its liabilities ( deposits ) there’s no loss. The bank may go busy from a perspective of being a “going concern” but there’s no hit to the taxpayer, no hit to the repository fund and no problem ( aside from for the stockholders of the bank concerned).
But when you permit banks to lie for 2 years for the explicit purpose of “trying to earn their way thru the cycle” you hitch your discussion to the view the real issue is one of client confidence, not OTT debt and loose lending.
Only a fool would have disagreed that given what we all know of the lending environment from 2003-2007, yet that’s precisely the debate that Bernanke, Paulson, Geithner, Bair and others have made thru this entire mess. President Obama should have closed all banks for a week when he first took office, sent in the examiners, and allowed those with non-performing loan bases of 2% or less to re-open.
He should have set out a 2% non-accrual standard and stuck by it – hit that, you’re closed. But that would have run dimensionally in contrast to the perspective that we must “enhance lending” to get out of this recession – a foolhardy point of view when the rationale you’re in recession in the 1st place is that too many folks made too many loans to too many people who had no cash to pay them back.
Now we’re stuck – we seem to have “avoided” a Depression, but we have in truth done no such thing. We have instead played “extend and pretend” writ massive on the taxpayer’s back, and yet the default rate continues to explode higher as we refused to coerce these establishments to disgorge their bad assets.
In fact the roots of this problem lies with loose ( or absent ) regulation over the last 10 years in the banking sector, where “fog a mirror” loans were available for just about any reason. As a result of our government’s refusal to face this problem head-on in 2007 and 2008 ( notwithstanding many looking for it, myself included ) we are far away from the end of this crisis, despite rallies in the exchange.
Indeed, I remain certain that recognition of fact will come fast and hard in the next year or thereabouts as these “not too large to fail” firms blow up one at a time, causing regulators to come in and close them, and ultimately, asset valuations are forced down to a realm that comports with fact.
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