Lately there have been many positive signs that the economy is “leveling out” in most parts of the country. However, the U.S. banking system will have to play a big part in that recovery and, from my perspective, many banks don’t appear ready to lead the recovery with lending.
There is no doubt the majority of U.S. banks are sound and have adequate capital to support their base of assets and potentially bad loans. But since many bankers operate in a “sheep-like” mentality, when there is bad news in one part of the banking community it tends to scare others in perfectly healthy banks. The potential problem, now, is that trouble with some of the still-ailing banks could trigger a widespread reaction in the banking industry. I believe there are at least three major issues hanging over the banking system and still threatening some of the institutions.
- Potential losses due to credit card write off. The banking industry has just begun writing off large losses in consumer credit card debt. There is a correlation between the national unemployment rate and national credit card rate write-off. In general, credit card write-offs trend 2 percent higher than the average unemployment rate. So if the national unemployment rate is 9.5 percent, then the expected credit card default/write-off rate will average 11.5 percent. This is a very big number for the banking industry in general and many banks have not yet written off their bad credit card loans. If the unemployment rate exceeds 10 percent, as it is expected to do before the end of the year, banks will be focused on trying to mitigate their credit card losses. Banks with large credit card portfolios will be in the worst shape. On the brighter side, all of this means that when the unemployment rate bottoms out, so too should the credit card default/write-off rate.
- Potential losses in commercial real estate. There is increasing evidence that we will see large numbers of commercial real estate foreclosures in large metropolitan areas around the U.S. South Florida, the upper Midwest, the Pacific Northwest, and Southern California are already seeing this trend. As the trend moves into cities like Dallas, Houston, and Atlanta we will see pressure on banks that may not have ever had bad sub-prime residential loans. Across the board, banks are downgrading the value of their collateral assets as the commercial real estate markets soften. Commercial lenders who work for banks that have large exposure are busy trying to “fix” existing loans so that losses are minimal. They are not focused on new loans, especially commercial real estate loans.
- Continuing residential foreclosures. August set another month for the highest number of new residential mortgage foreclosures across the U.S. Like the credit card default/write-off rate, this trend tracks the unemployment rate. As consumers continue to loose their homes at alarming rates, the banks have to liquidate the asset and take their losses. I think the residential foreclosure rate will moderate when the unemployment picture improves. There has been one positive trend concerning residential foreclosures, however, and that is that banks in general are working longer with a homeowner on trying to find a solution so foreclosure doesn’t happen.
Until we see substantial improvements in these three areas, banks are going to stay focused on protecting the loans on their books rather than initiating new ones.