Defaults among prime borrowers are really starting to pick up. Why? Cause even solid borrowers can fall behind if they lose their jobs.
Credit card companies see much deeper charge offs than they’d foreseen just a few months ago. Again, unemployment.
While the talking heads insist that unemployment is a “lagging indicator”, it’s pretty clear that the financial system is highly levered to this numbers, so it’s hard to imagine a real turnaround unless the economy stops bleeding jobs.
A new report from FBR analyst Paul Miller says the health of the banking system all depends on this number:
FBR has constructed it own stress test ahead of the planned release of the government’s stress test parameters this Friday, April 24. We tested nine commercial banks under coverage, using 10%, 12%, and 14% unemployment rate scenarios. We conclude that, if unemployment peaks at 10%, roughly consistent with the government’s stress test, most of the big banks will be able to earn through it.
On the other hand, if unemployment is closer to 12%, which FBR believes is more realistic, their viability without additional capital is more questionable. FBR surveyed 62 buy-side clients and found that 41% expect unemployment to peak between 10% and 11% and that 39% expect unemployment to peak between 11% and 12%.
And if unemployment goes to 14%… well then nearly all all of the major banks will have negative Tangible Common Equity, or put in other way: insolvency.
Obviously this is the number that elected officials look at, since for most people, a good economy means that they and the people they know have jobs. Employed people are less likely to vote out politicians.
But as we’ve been saying, we expect unemployment to remain exceptionally high even into the “recovery” period, whatever that means. That’s because besides the cyclical changes, the economy is also experiencing deep secular shifts resulting in displacement and lag time between jobs, as workers and industries take longer to adopt.