A car needs gas to run. An engine needs steam. A factory needs power. The fact is without a steady source of energy nothing can operate. Welcome to the Uncle Sam economy circa 2009.
You may be thinking, wait a second LD . . . the Federal Reserve is flushing the system with liquidity. Money is easy and it is propping the markets. While availability of credit may be tight, the demand for credit is also weak. So what am I talking about?
Thanks to RM for providing the FDIC Third Quarter 2009 Banking Profile (a link to the full document is provided at the end of this commentary). For those who care to rip apart the inner workings of our banking system, this report is the owner’s manual. The report highlights the following:
- Industry Posts Net Profit of $2.8 Billion
- Increased Revenues, Lower Securities Losses Offset Higher Loan-Loss Provisions
- Net Interest Margins Improve at Most Institutions
- Troubled Loans Continue to Rise, But Rate of Growth Slows
- Loan balances Decline by 2.8% in the Quarter
Based on this overview, it would appear that the banking industry is slowly recovering. In aggregate, perhaps that may be the case. But what doesn’t this report tell us?
This report does not highlight the massive disintermediation that has occurred within the community banking industry in our country. Why has this occurred and to what extent has it occurred?
Uncle Sam is very clearly backstopping the largest institutions given their status as ‘too big to fail.’ With Uncle Sam’s support, core deposits have been withdrawn – that is disintermediated – from the smaller institutions to the largest institutions.
In the course of a discussion with a banking executive this afternoon, this longstanding veteran apprised me that the domestic FDIC-insured banking industry has a total balance sheet of approximately $13 trillion. Prior to this crisis, the balance sheets of the four largest institutions accounted for approximately 25% of the total banking industry’s balance sheet. What is that figure now? Approximately 65%!!
The too big to fail is now 250% bigger. The money has poured into these institutions given Uncle Sam’s backstop. Meanwhile, money has fled the small regional and community banks and left the local economies without credit.
No credit. No source of fuel. No growth. No jobs.
What might Washington think about doing? Time to break up the oligopoly in the large money center banks. How might that be done? Reinstitute Glass-Steagall.
What do you think?