After enduring extraordinary shocks in 2008, the U.S. banks entered an exceptional state of turmoil in 2009. Starting as a credit issue in the subprime segment of the mortgage market, the sticky situation infected almost the entire financial services industry, and all corners of the globe. In other words, the financial crisis ultimately morphed into a massive economic crisis, which has had major ramifications across the whole world.
Entering 2010, although the banking industry is dealing with liquidity and confidence challenges, it is now comparatively stable with financial support from the U.S. government. The government had taken several steps, including programs offering capital injections and debt guarantees, to stabilize the financial system.
We believe that the worst of the credit crisis is now behind us. After more than a year of initiating the $700 billion Troubled Asset Relief Program (TARP), a lot has improved with respect to the economic crisis.
But the banking system is not yet out of the woods as there are persistent problems that need to be addressed by the government before shifting the strategy to growth. We believe that the U.S. economy will regain its growth momentum once these issues are resolved.
While the bigger banks benefited greatly from the various programs launched by the government, many smaller banks are still in a very weak financial state and the Federal Deposit Insurance Corporation's (FDIC) list of problem banks continues to grow.
Despite the government's strong efforts, we continue to see bank failures. As the industry tolerates bad loans that were made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.
Furthermore, government efforts have not succeeded in restoring the lending activity at the banks. Lower lending will continue to hurt margins and the overall economy, though the low interest rate environment should be beneficial to banks with a liability-sensitive balance sheet.
Out of the $247 billion given to banks, $162 billion has come back from the healthy banks who have repaid their TARP funds. Banks have paid an additional $11 billion in interest and dividends. Also, taxpayers have received decent returns on many of its financial-sector investments.
