If Andrew Lloyd Webber and Tim Rice wrote a musical about the banking crisis in the United States, they would probably call it—Ode to the Banks Too Big to Fail and the primary theme song would be “Don’t Cry for Me, America.” Legal and foreclosure problems be damned.
How much trouble is the banking world in these days? You might be surprised at what you would find out because the answer is: not as bad as you might think. As Warner Wolf might say to prove his case, “Let’s go to the videotape.” And in this case, the videotape is the quarterly banking industry information submitted to the Federal Deposit Insurance Corporation (FDIC).
Exhibit 1.0 provides a composite view of the equity to asset ratio for the entire banking industry at the end of each quarter from the 1st Qtr 2002 (03/31/2002) to the 2nd Qtr 2010 (06/30/2010–the latest quarterly information available). This information is compiled by adding up the information from the financial reports submitted by more than 8,000 banks, including those of the banks “too big to fail”.
Photo: Jim Boswell
In addition, to the Equity/Asset ratio, Exhibit 1.0 also shows the ratios for non-performing assets (NPA) and loan loss allowances (LLA) to asset levels. Non-performing assets as defined in this case include all delinquencies (i.e., 30-90 day delinquent, 90+ day delinquent, loans in foreclosure, and real estate owned loans). Loan loss allowances are amounts that have already been accounted for in the Income Statement and set aside on the balance sheet to cover future losses associated with non-performing assets.
In other words, the difference between NPA and LLA is the amount that the banks would have to make up using Equity if the real value of “all” non-performing assets was zero rather than the amount currently booked. In this worst case scenario, then the Revised Equity to Asset ratio would need to be revised as reflected by the Rev Equity line shown in Exhibit 1.0.
How good or trustworthy is this information? Pretty darn trustworthy, considering the following:
- Banks have been reporting this quarterly information in a standard format to the FDIC for nearly 20 years;
- The trend graphs for both NPA and LLA reflect somewhat an expected shape knowing the reality of the housing situation in America;
- More than $400 billion in loan assets have already been written off as losses in the Income Statement and no longer are reflected as assets on the books or Exhibit 1.0. There is no double-counting here. The nonperforming assets reflected in Exhibit 1.0 are above those losses already accounted for;
- Composite information (especially when it consists of 8,000 reporting entities using standard formats) is much better than sample data sets or anecdotes; and
- The data source (FDIC) for the data and the consequences of intentionally reporting incorrect data to the FDIC.
The current amount of all non-performing bank assets as reflected in Exhibit 1.0 is $514 billion compared to a total banking industry asset level of $13.2 Trillion and an Equity level of $1.5 Trillion. Considering that $251 billion in loan loss allowances have already been set aside on the balance sheet as if the 2nd Qtr 2010, even if you wrote off the entire value of the $514 billion of non-performing assets, the effect on the total banking industry Equity would only reduce it to $1.25 Trillion, which still reflects a 9.42% equity to asset ratio—higher than at any level prior to the 3rd Qtr of 2004.
What about the banks “too big to fail’? The same thing holds true. The four largest banks in the banking industry (i.e., JP Morgan/Chase, Bank of America, Citigroup, and Wells Fargo) account for 45% of all banking assets, 43.5% of the equity, 52.5% of all non-performing assets, and 55.4% of all loan loss allowances. The current equity to asset ratio for the big four banks is 11.0% and would be revised to 8.8% if all of their non-performing assets become absolutely worthless.
In case anyone is interested, the above analysis would also have held true back in the fall of 2008 when the Government plied the big banks with billions of dollars of TARP funds. Exhibit 1.0 might also explain how the banks managed to pay those TARP funds back so quickly. And for anyone curious enough to validate my statements, all you have to do is go into the FDIC’s database and look the numbers up. The data is still there for anyone to see.
So don’t cry for me, America. In fact, if you want to cry for someone (not that you should), then cry for the banks that the FDIC has already shutdown and/or is planning to shutdown in the next year or two. Because if you look at the individual reports of those banks, you will quickly discover that after accounting for their Non-performing assets and their loan loss allowances that 90-nine times out of a hundred that their Equity to Asset ratio when adjusted carries with it a “negative” value—a far cry from the current revised composite ratio of a positive 9.42%.
If you ran this analysis separately on all “active” banks, you would find that less than 400 banks (5%) reporting to the FDIC are reporting conditions that would reflect a negative Equity/Asset ratio. Consistent with standard statistical expectations, all of those banks are relatively small, reflecting a total asset level of approximately $200 billion. Widen the gap to account for questionable Equity values and you might be able to get near the $400 billion, safely-conservative, amount that the FDIC says is associated with their list of troubled banks.
Did I fail to tell you also that Net Income levels for the banking industry are beginning to rise again? Did you notice on Exhibit 1.0 that non-performing assets dropped for the first time since our little crisis began? Did I tell you that drop was also reflected in each and every one of the major sub-categories (i.e., 30-90 day, 90+, non-accrued loan assets) of non-performing loans?
Do what you want, but don’t cry for me, America. Although you might think I am dying, that is hardly the case. There is nothing ahead that can’t be managed. Critics be damned, the current foreclosure problem will get fixed. So don’t be surprised with my miraculous recovery. In fact, if you want to be surprised then be surprised with the big bonuses I pass out this year.