The one thing that seems to provide an explanation for a lot of the things going on today is the continued weakness of the banking sector. It explains the actions of the Federal Reserve System. It explains the actions of the Treasury Department. It explains much of the data that are being released. And, it explains much of the behavior of the banking sector, itself.
The secret: the banking sector is a lot weaker than the government is letting on and the government does not want to publicly recognize the fact.
The FDIC recently released numbers on the banking industry for the third quarter. Profit-wise, the industry is very skewed. It is skewed toward the larger banks. The results have been summarized this way:
- Banks with assets less than $1 billion in assets roughly broke even in the third quarter;
- Banks with assets between $1 billion and $10 billion, on average, lost $3 million apiece;
- Banks with assets in excess of $10 billion recorded an average profit of nearly $42 million each.
The big banks, the banks that the regulators were most concerned with, are reaping a bonanza. And, why not? The Fed is keeping short term interest rates down: financial institutions can borrow for three-months in the range of 20-25 basis points in the commercial paper market and the large CD market; they can borrow for six-months in the 30-65 basis points in the CD market or the Eurodollar market. They can buy Treasury bonds that can yield 330 to 400 basis points. This is a nice spread. Plus these banks are traders and there has been plenty of volatility in the bond market in recent months. And, this does not even include the possibilities that exist in the carry trade.
As Eddy, Clarke's brother-in-law, remarked in the movie "A Christmas Vacation": "This is the gift that just keeps on giving!"
Why?
Because the Fed is going to keep short term interest rates low for an "extended period" of time.
This effort is just another way to "bail out" the big banks!
But, what about the banks that are smaller than $10 billion in asset size?
Here the commercial banking industry has been given a gift of $1 trillion in excess reserves.
And, what is going on in this part of the banking industry? The FDIC released the third quarter information on problem banks. The total of problem banks in the country is 552, up from 416 at the end of the second quarter. Almost all of these banks are of the smaller variety. Given that 50 banks were closed in the third quarter this means that 186 new banks achieved the honor of being placed on the problem list in the third quarter.
It is estimated that at least one-third of the 552 "problem" banks, or 182, will fail in the next 12 to 18 months. If this is true then the United States will experience 2.5 to 3.5 bank closures a week for the next year to a year-and-a-half.
