Financial experts from a variety of disciplines are not finding much to cheer about following the more rosy reports coming out of Wall Street, the Banking Sector and the Government. They are saying that the value of key collateral on loans is still falling. That close to half of bank lending continues to be tied to real estate, which has shifted from boom to bust in many parts of the United States. Presently the typical home price is down more than 20 percent nationwide, and it has continued to fall by about 2 percent a month. The experts are saying that if that continues, it boosts both the likelihood of defaults by borrowers and the losses for banks when they resell those homes after foreclosure. In the meantime the FDIC reported that loans are going delinquent faster than banks are adding to reserves to cover those losses. This certainly will hit bank profits down the road.
Uncontrolled accounting methods may also be hiding key problems even though banks are saying that a shift away from so-called mark-to-market accounting is a more accurate reflection of the assets’ worth. Banks may be right. But the resulting values could also prove to be too rosy. Just take that pool of risky assets at Citigroup, which the bank is valuing at $101 billion. The more accurate mark-to-market accounting would put the actual value of risky assets at only $29 billion. Losses could therefore outweigh capital on hand.
Collectively, US banks have equity capital of $1.2 trillion, or about 10 percent of their loans, the FDIC says, but many economists including those at the International Monetary Fund (IMF) warn that "hidden" bank losses of those not yet recognized in charge-offs – are larger, possibly exceeding $2 trillion. This could wipe out their equity capital, says Peter Nigro, a former economist at the Office of the Comptroller of the Currency, now at Bryant University in Smithfield, R.I. If you put all that together, the negative forces make it very hard for banks to earn their way out of losses by relying on their interest-rate spreads. "So what the yield curve is doing now is mitigating those losses a little bit", says Mr. Lachman, who used to work for the IMF. Moreover, Lachman expects that European banks will see rising loan problems this year, with ripple effects that will hurt US banks as well.
For the US and European economies to stage a strong recovery, banks need enough capital to lend strongly, economists say. That’s especially true today, because other channels of credit that were strong before the recession, like debt securities funded by non-bank investors, have basically disappeared. The risk, they say, is that political pressures will prevent or delay an accurate assessment of bank losses and how big their write-downs should be and how much capital they need. Another issue that still has not been answered, what are these assets on the bank balance sheets actually worth? Overall it seems to indicate that the financial sector has not yet turned the corner, but instead still remains in a precarious situation.
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