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business newsReduction of Loan Balances Isn't Enough
By
Peter Atwater
Apr 22, 2010 9:00 am
The focus of financial services reform, as it stands, is too narrow.
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The headline for the lead story in this morning's USA Today reads "Banks receiving US assist cut loans: Pay boost also more likely, analysis finds."
While I can't/won't defend the bankers on the compensation front, I would offer five thoughts on the reduction of loan balances on the biggest banks' balance sheets.
First, since last spring, there has been a flood of corporate issuance in the bond market. A significant portion of the proceeds was used to repay bank borrowings at the largest banks.
And in this regard I'd note that for all the talk about "financial services" reform, what is really developing is just "banking" reform. By my estimate, banks represent only one-third of total US financial assets, and until reform focuses on the whole, systemic risk will remain high.
To use an analogy, there are lots of pockets on this pair of pants, and I'm afraid that reform of just one will simply end up moving money to another.
Second, and related, I wouldn't underestimate how the "reprioritization" of consumer debt payments is skewing "bank only" data. As delinquent homeowners use cash to repay other consumer debt, bank balance sheets drop. At the same time, the offset (rising first mortgage delinquencies) is found on non-bank balance sheets. Not to beat a dead horse, but I'm deeply concerned that the media, Congress, and the regulators are missing the forest for the trees.
Third, over the past year, often at the request of the regulators, banks have taken significant writedowns, and the largest percentage write-downs have been at the largest banks, due to their portfolio holdings of credit card loans where the annualized charge off rate is over 10%.
Fourth, over the past year, the US government has taken over the student lending business and substantially all new mortgage originations have flowed through government-sponsored entities.
Finally, my analysis of the data suggests that credit demand (by creditworthy borrowers) has plummeted over the past year, and consumer attitudes toward debt, particularly at the high end, have changed dramatically. The consequence has been unprecedented repayment rates of high-priced debt, particularly credit cards, which (because of the consolidation of the credit card industry) only affects the largest banks.
Again, my point is not to defend the compensation behavior of the banks. I'm just trying to offer perspective on the data.
One final and unrelated note on the USA Today article. The source of the data cited in the article was a USA Today/American University review. And I couldn't help but notice that Wendell Cochran, the senior editor of the Investigative Reporting Workshop at American University (the unit responsible for the data) "contributed" to the story.
Call me old-fashioned, but articles "co-written" by sources belong on the op-ed page as opinion, not on the front page as news.
Position in SPY options, SRS, SH, and JPM
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