A JPMorgan analyst suggests that the current maelstrom surrounding banks could cost the industry somewhere between $50-$120 billion, but arguably the fears here are being overblown.
But there is a clear threat that is very easy to see: the economy is weak and banks don’t have the business volume to make a lot of money.
As credit specialist David Goldman observers, banks are still plowing more and more money into government securities — the opposite of real banking activity.
What should worry investors, rather, is the simple question: how can the banks make money when no-one wants to borrow and asset returns are imploding? The absence of viable investment opportunities for the banks is illustrated most poignantly by one data point, namely banks’ accelerating purchases of Treasuries.
Bank purchases of treasuries spiked upward during the past several weeks just as the yield curve flattened and Treasury returns collapsed. It was one thing for banks to borrow at next to nothing and buy 2-year notes at 1%. The trade doesn’t make sense now. It is risky for banks to go far out the yield curve, but they seem to be doing so.