#bankingcrisis

Banker Buster?

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Before the GFC in 2008, bank shares across the globe were flying. Financial engineering promised a new paradigm of wealth creation and abundant profitability. They were unstoppable.

However 12 years later, many banks look mere shadows of their former selves. We are told by our political class to believe that our economies are robust and that a low-interest rate environment will keep things tickety-boo indefinitely. After all the wheels of the economy have always been greased by the financial sector.

If that were true, why does Europe’s largest economy have two of its major banks more than 90% off the peak? Commerz has shrunk so far that it has been thrown out of the DAX. Surely, Japan’s banks should be prospering under Abenomics so why are the shares between 65% and 80% below 2007 levels?

Ahh, but take a look at those Aussie beauties! How is it they have bucked the global trend? How can Commonwealth Bank be worth 6x Deutsche Bank?

Although we shouldn’t look at the Aussie banks with rose-tinted glasses they have mortgage debt up to the eyeballs. Mortgages to total loans exceed 62% in Australia. The next is daylight, followed by Norway at 40%. Japanese banks, before the bubble collapsed, were in the 40% range. CM wrote a comparo here. There is a real risk that these Aussie banks will require bailouts if the housing market craps out. It carries so many similarities to Japan and when anyone ever mentions stress tests – start running for the hills.

If you own Aussie banks in your superannuation portfolio, it is high time you dumped them. Franked dividends might be an ample reason to hold them, but things in finance turn on a dime and this time Australia doesn’t have a China to rescue us like it did in 2008-09. More details contained in the link in the paragraph above.

In closing, Milton Friedman said it best with respect to the ability of central banks to control outcomes,

“… we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and as a result, in danger of preventing it from making the contribution that it is capable of making.

 

Delinquency rates jump 50% on US Commercial & Industrial loans

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The St Louis Fed reports that delinquency rates on commercial and industrial loans is rising from 1% in Q4 2015 to 1.5% in Q1 2016. That is a 50% jump. Delinquent loans and leases are those past due thirty days or more and still accruing interest as well as those in non-accrual status.

So even it paltry levels of interest rates, business conditions aren’t such that businesses are thriving.  Current outstanding commercial and industrial  loans amount to $1.81tn. That puts delinquencies at $27bn.

Delinquencies on residential mortgages in Q1 2016 stands at 4.84% down from 5.17% in Q4 2015 and from the peak of 11.26% in Q1 2010 and triple the rates of 2005…