What’s to Like About the United States Banking System?

I really don’t see much to like in the United States banking system.

With interest rates so low across the board, commercial banks have very little interest rate spread to work with.

With Congress and the regulators so screwed up and yet so anxious to pass laws and regulate, the “regulatory risk” and the “complexity risk” facing the industry is enormous.

There is still plenty of evidence that commercial banks have a lot of unrecognized overvalued assets on their balance sheets. (link)

There seems to be growing interest in suing banks that are alleged of “making misleading public statements as the property market crumbled in 2007 to hide internal downgrades of loans from investors” (link) or for other reasons that banks failed to appropriately disclose their financial condition. There are also other settlements coming related to bank lending practices in the 2000s.

Bank earnings are a mixed bag, at best. The larger banks are not performing well because trading profits and profits on many non-traditional banking operations are off. (See JPMorgan and Citigroup) The returns to trust banks (BNY Mellon, State Street Corp. and Northern Trust Corp.) are sagging because these institutions have taken a “defensive position” with respect to the financial markets and shifted a substantial amount of funds into cash and ultra-safe assets. (link)

Only the banks that have stayed pretty much as traditional banks (like Wells Fargo, U. S. Bankcorp, and PNC Financial Services Group) have held up, profit-wise, in recent periods. This performance seems to be connected with some minor pickup in loan growth.

Even in the case of loan growth, analysts are relatively pessimistic about the future. “It appears that much of the commercial loan growth we have seen at the large cap banks is coming from large corporate syndicated lending. Not all banks are players in this market.” This from Christopher Mutascio at Stifel, Nicolaus & Co. Note that Mutascio is expecting “total loan growth and commercial loan growth” to slow in 2012. No bounce here. (link)

In my most recent blog I discussed the effort of BankUnited, a Florida-based bank, to sell itself because of the condition of the banking industry, especially in Florida. BankUnited wanted to grow and yet could find no other banks to acquire…and they had looked at about 50 banks in the Florida region and elsewhere. Because of the state of the banks available to acquire, BankUnited decided to sell.

Well, yesterday, BankUnited pulled itself “off the market”. The bank had attempted to set up an auction for itself but only Toronto-Dominion Bank and BB&T Corp. submitted preliminary offers. These offers did not come up to the price of that BankUnited received when it went public last year. Thus, the bank withdrew its offer to sell. (link)

Some of the banking statistics reflect the stagnant nature of the banking system as a whole. For example, total commercial banking assets in the United States rose by about $700 billion last year.

Note, however, that cash assets at commercial banks rose by about $515 billion! That is, almost 75 percent of the growth in bank assets came from an increase in the cash holdings of the banks.

Also, note that about 80 percent of this increase in cash assets at commercial banks in the United States occurred at foreign-related financial institutions.

Furthermore, these foreign-related financial institutions increased their commitment to Net Deposits Due to Foreign-related offices by almost $650 billion. Thus, these foreign related institutions took U. S. dollars and shipped them off-shore! Thank you Federal Reserve System!

In all, the share of United States banking assets going to foreign-related financial institutions rose from about 11 percent to almost 15 percent from December 2010 to December 2012. The largest twenty-five domestically chartered banks in the United States continue to account for almost 60 percent of the banking assets in the country. The smallest domestically chartered banks (about 6,300 of them) continue to shrink as a proportion of banking assets.

The American banking system is welcoming more foreign-related financial institutions to the ownership of its assets…note that one of the two bidders for BankUnited was Toronto-Dominion Bank…and is also seeing more and more of its assets being held by larger banks.

Right now, the commercial banking system seems to be going nowhere, just restructuring.

This is just a very, very tough time for the banking system. It is a time of transition. The whole industry is changing. (link) But, then, the whole world seems to be going through a period of transition.

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