This is the second in a series of four articles that I have written exclusively for Business Insider that will do much to explain the financial and operating impact on the banking industry since the industry first began to recognise at the beginning of 2007 the cost attributable to their misguided ways.
In my first article I explained how the $550 billion bill for the industry’s mistakes had been delivered and paid: first, by already writing $380 billion of bad loans off the industry’s balance sheet; and second, by setting aside another $170 billion to add to their pot of “loan loss allowances” in preparation for future losses expected with currently non-performing loans.
In today’s article I intend to explain specifically where the banking industry took the biggest hit for their mistakes by looking in detail at the loans already written off the balance sheet.
And the best way to start is with Exhibit 1 which provides you with a quarterly historical perspective of banking industry write-offs.
Photo: Jim Boswell
Exhibit 1 is quite telling for a number of reasons. First, just by looking at the shape of the curve we can tell that the history of loan write-offs is following the typical pattern (similar to the shape of a “normal” curve) for accounting for losses of a typical problem cycle. What goes up—does in fact eventually come down.
Second, by looking at Exhibit 1, not only can we tell when the problems associated with our current fiscal crisis first began to really show itself (around the 3rd quarter of 2007), we can also tell when the problem peaked and begin determining the full cost of the crisis by adding up the area under the curve from that point forward (subtracting of course a minimal average each quarter based upon pre-crisis averages).
By the way, the area under the curve through the 3rd quarter of 2010 is $380 billion. And as mentioned above and in yesterday’s article, the banking industry has already accounted for (and set aside) another $170 billion in “loan loss allowances” to cover future losses that are predicted as the right hand tail of Exhibit 1 fills out and returns to pre-crisis levels for write-offs.
Thirdly, Exhibit 1 also tells us where the $380 billion of loan write-offs were taken (i.e., in real estate, commercial, agricultural, individual, or other loans). Although Quanta Analytics (QA) has broken down these categories further and looked at bank loan write-offs in more detail, for this article we feel it is sufficient to stay at the level shown in Exhibit 1.
Now here are the findings for the three categories that accounted for the greatest amount of banking industry write-offs and losses in order of their relative magnitude:
Bank write-offs for “Real Estate” (Single Family, Construction, RE Commercial, Multifamily, Other) loans peaked around the end of the 4th Quarter of 2009 with approximately $30 billion of write-offs for that quarter. To date since the beginning of 2007 the amount of “Real Estate” losses above expected norms has totaled $207 Billion (representing more than 54% of all bank write-offs). Without further explanation, Exhibit 2 should suffice in showing how QA came to this conclusion.
Photo: Jim Boswell
The next largest set of bank write-offs took place in the “Individual” (credit card and other individual) loan category. Our QA analysis shows that the bank write-offs in the “Individual” loan category peaked around the end of the 1st quarter of 2010 with approximately $28 billion of write-offs during that period. In total, $96 billion of “Individual” loans have been written off above expected norms (representing 25% of all bank write-offs) since the beginning of the financial crisis.
The third largest set of bank loan write-offs took place in the “Commercial/Industrial” loan category. Write-offs in the “Commercial/Industrial” loan area peaked around the end of the 3rd quarter of 2009 with approximately $9 billion of write-offs for that quarter alone. In total, $54 billion of “Commercial/Industrial” loans have been written off above expected norms (representing 14% of all bank write-offs) since the beginning of the financial crisis.
Besides looking at actual write-offs to date, QA has also looked at the current status of non-performing loans using the same level of loan category detail. Some of the findings associated with that analysis will be provided in my third article associated with this series.
If you would like to see further results relating to the above analysis, which shows even more detail, simply email me using the email address of my BI profile and ask for the Powerpoint presentation that is associated with the analysis.
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