I just got a chance to wade through the latest Federal Reserve Bank data on asset quality. Apologies, as these figures, which usually come out around the twentieth of the month after a quarter end were actually out November 16 and are now a few weeks stale.
I haven’t seen much written on these statistics in recent weeks, however and I personally like to track the bad debt debacle using this quarterly data for reasons I have outlined previously, not the least of which is the fact that these are not “mark-to-market” figures. These numbers represent debt at a large cross section of banks that has gone delinquent, i.e., the borrower has stopped paying, rather than write-offs of debt that is expected to go delinquent or has suffered a significant decline in market value. As the recent rally in credit markets has demonstrated, trading values of debt can display significant swings based on factors far removed from the credit worthiness of individual borrowers. You just have to look at what has happened recently with Dubai World’s debt which recovered, post the world financial crisis, to above par only to crash to 40 cents on the dollar in a couple of days – to understand how volatile debt values can be in the marketplace.
Let’s get right to the punchline. The Q3 bank delinquency data are awful in general. The only positive things that can be said about it are:
1) Delinquency rates, while at historically record levels for various types of bank loans, did not accelerate quarter to quarter across the board as commercial real estate and credit card delinquency increases slowed in basis point terms from the Q1 to Q2 09. However, all delinquent loans as a percentage of all loans at banks regulated by the Federal Reserve reached an all-time record high of 6.87%, eclipsing the prior peak of 6.33% in Q1 of 1991.