Let me answer that question with another question: Have you ever read the QBP from the FDIC? Or even heard of it?
I can’t blame you if your answer is “no.” The acronyms stand for the “Quarterly Banking Profile” and the “Federal Deposit Insurance Corporation.” The QBP provides a comprehensive portrait of the health of the banking sector every quarter. The FDIC, of course, is the federal agency that provides you and me with deposit insurance on our bank accounts.
We haven’t had to worry about the banking system for some time now. While net interest margins on core lending operations have been under pressure, delinquencies, defaults, and charge-offs have been negligible. Loan growth has been healthy and a decent, if not stellar, economy has generally helped borrowers meet their obligations.
Indeed, only eight FDIC-insured institutions failed in 2015. That was down from 18 a year earlier, and a huge drop from the peak years of 2010 and 2009. Almost 300 banks failed in those two years alone.
So-called “problem institutions” that the FDIC has identified as having financial, operational, or managerial risk also fell to 183 last year. That compares with a peak of 884 from a half-decade earlier, as you can see here:
So what’s the problem? Well, if you’ve been following the financial sector as long as I have, you know that failure is the last step in the process.
First, your borrowers start missing payments. Then if the underlying economy and loan fundamentals are too weak, your attempts to “cure” those delinquencies fail. Only then do you have to charge off your losses, something that erodes bank capital if those losses go above and beyond the reserves you’ve set aside. That, in turn, can push you one step closer to failure.
Bank stocks often start rolling over long before failures peak, too. Case in point: The SPDR S&P Bank ETF (KBE) topped out in the first quarter of 2007, then proceeded to lose a whopping 85% of its value over the next two years. It then began a long, slow climb back even though failures didn’t peak until 2010.
I’m not suggesting we’re on the cusp of a 2007-2009-style collapse. But the latest QBP report does note that provisions for loan and lease losses are rising again. In fact, they climbed for a sixth consecutive quarter to a three-year high of $12 billion.
As for charge-offs, they rose 7% from a year earlier – the first such increase in 22 straight quarters. Commercial and Industrial (C&I) loan charge-offs surged more than 43%, while auto loan charge-offs jumped almost 16%.
In other words, we’re starting to see some fraying around the edges.
|“We’re starting to see some fraying around the edges.”|
Energy losses are a key driver of the deterioration now, and some of the commercial real estate and auto sector risks I’ve highlighted could be problems down the road.
So keep an eye on this trend. There haven’t been a lot of Friday afternoon “bank closure” press releases like this one from the FDIC lately. But if the economic weakness in energy broadens out, and it turns out bank executives were too optimistic about their credit exposure, we’re going to see plenty more in coming quarters.
What do you think? Will it be time to talk about bank failures again before long? Or is the industry in good enough shape to weather the current level of credit risk? What do you think about investing in bank stocks here? Are they good bargains? Or is another major leg down looming? Share your thoughts when you have a minute.
Is something else responsible for the weak economic outlook, like demographics? Is there another leg down for the energy sector, only in a place few are talking about? You tried to answer those and other questions here at the website in the last 24 hours.
Reader Denise mentioned the demographic impact overseas in these comments: “Europe’s real problem is demographics. There aren’t enough kids born today and that’s going to hurt economic growth.”
In response, Reader Gordon said: “I think couples are getting smarter. They want a decent life for themselves and to not spend it all on raising kids. Being a parent, I will state that kids are a lifetime obligation and there is no real leaving the nest. The government, of course, thinks otherwise and wants you to spend, spend on them all the way from diapers to university.”
As for the reaction from European and U.S. policymakers to slow growth, Reader Al said: “The ECB, and for that matter, the Fed, somehow feel compelled to make changes. In the business world, ‘do nothing’ is a decision, so perhaps the ECB and the Fed should consider doing nothing and allowing the markets to move in and of themselves for a change.
“If anything, a tax cut for manufacturers who have lost business to China may stimulate real employment, therefore allowing the consumer to lead us out of this down market. And yes, when that occurs, the housing sector should also improve.”
Reader Myron also offered this take on the economy and the energy markets: “The economy has been propped up by the Fed’s ZIRP, and held back by the Affordable Care Act. The downturn in oil and natural gas has also had a big impact on confidence, spending and the housing market.
“In 1986, oil prices collapsed, and in 1987, the stock market crashed. I feel oil has bottomed, but natural gas hasn’t and the impact of low natural gas pricing will be the next shoe to fall in the energy sector.”
Thanks for your input. Declining birth rates and a general aging of the population are indeed longer-term issues for advanced societies, particularly in places like Japan. But to me, the biggest issue of all is lackluster income growth. Without substantial wage and salary increases, the U.S. economy (as well as economies in Japan and Europe) is going to continue to struggle. And I don’t see any evidence that disposable, take-home pay is going to accelerate any time soon.
As for monetary policy, Reader Al is right on. If policymakers would just get out of the way, and stop throwing monetary spaghetti at the wall every few weeks to see what sticks, maybe the economy and the markets would gradually heal on their own.
Agree? Disagree? Have anything else to add? Then let me hear about it in the discussion section.
European banks continue to melt down, with the U.K.’s Barclays PLC (BCS) the latest today. Its shares tanked 10% in London after the company cut its dividend in half and announced plans to exit its African businesses. The firm’s losses more than doubled to 394 million British pounds (about $548 million) in 2015, and it’s in the process of shedding thousands of jobs via attrition and layoffs.
In just a couple of hours, we’ll know just how many states Donald Trump won in Super Tuesday elections. A total of 12 states, including Texas, Virginia, Georgia, and Minnesota, are awarding 595 Republican delegates overall. Donald Trump is leading in the polls in most states, though Texas could go to Ted Cruz.
We got more negative news out of China overnight, with the country’s official gauge of factory activity falling for a record seventh month in a row to its lowest level since January 2009. A companion index that tracks the services sector dropped to the lowest since December. But investors took heart in comments from officials saying they wouldn’t further devalue the yuan currency for now.
Also in Asia, Japan held the first auction of longer-term notes paying a negative interest rate. Roughly $19 billion of 10-year notes were sold to yield -0.02%, with talk suggesting “real money” buyers stayed away even as flippers and speculators looked to jump in and then re-sell the notes to the Bank of Japan soon after. Gotta love the unintended consequences of radical monetary policy.
What do you think of the latest news on China’s economy, or the fact Japan is now selling bonds at negative yields? How about these European banks? Will they ever get it together? Do you have any thoughts about the Super Tuesday results, and where the 2016 presidential election goes from here? Let me know in the comment section.
Until next time,
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