According to a recent article in CFO magazine, the Bank for International Settlements, “the bank for central banks,” issued its annual report published Monday. The article “Banks Not Out of the Woods” highlighted several points about the state of banks in the US:
1)Concerns over the impact of new regulations on the health of banks
2)Writing down losses – balance sheets are generally weaker than reported, as banks have not been forced to write down the real value of many assets.
3)Commercial real estate portfolios: In the US, more than 100 community and retail banks have a ratio of commercial real estate to total loans of more than 50%. Delinquency rates on these loans rose to more than 8% in the U.S. last year, double the rate a year ago. Congress is even considering inserting a provision in the financial reform bill that gives 7,800 banks permission to spread their losses on real estate loans over a 6-to-10-year period.
4)The BIS is doubtful that banks will be able to refinance their huge funding needs, given that funding maturities for banks are at their shortest in 30 years. In the United States, hundreds of small banks have yet to repay Troubled Asset Relief Program funds, and some have also failed to make required dividend payments to the government.
5)The Spread between the interest rates that banks can borrow at and the rates that banks are actually charging consumers for mortgages represents one of the largest profit margins banks have had for a long time. However, this may be providing false support as it cannot continue forever.
As we have written before, we are fortunate in this state that most of our banks have had more conservative lending practices and have therefore been less susceptible to the scope and scale of banking problems elsewhere. However, the entire banking system is linked together, so we need to keep our eye on the big picture.
Business Bank Lending Declines
Current state of Bank Lending – Business Lending
US Bank lending (Commercial & Industrial Lending) as reported by the Federal Reserve Bank continues to decline and was down 18% in May year-over-year. This 18% decline is twice as severe as the previous worst decline in history of 9.3% in 1949. And the monthly declines show little signs of slowing. See chart in this story, which shows percentage year-over-year declines in lending.
Current state of Bank Lending – Real Estate Lending
The picture is even worse for real estate lending at US banks. For the first time on record, we are seeing annual declines in real estate lending, down 4.6% over the same period last year. Until 2009, there had never been a year-over-year decline in real estate lending in the US and this may continue to worsen.