Tag Archives: banks

(Revised) Your bank hasn’t seen you in a while!

Bankrate.com conducted a survey asking participants: “When was the last time you visited a bank branch or credit union branch to conduct personal financial business?”.

The results were not as informative as I initially hoped. Every monthly report, Bankrate asks one ‘oddball’ question as I learned by going through February’s financial security charts report. This was March’s oddball question. Thus, I couldn’t find a chart of this question’s answers over time.

 

Here are the interpretations from the data that Bankrate made. I will attempt to justify the causation for these results in the data.

 

Younger people were less likely to visit their banks or credit unions. Only 19 percent of respondents between 18 and 29 years old said they visited within the last week, compared with 29 percent for those between 30 and 49 years old. – Bankrate

Younger people aren’t going to the bank for two reasons. (1) We have better things to do than visit the bank (2) We can all deposit our checks and view account info through an ATM, mobile app, or on the bank’s website. This has definitely been my experience. In fact, if I recall correctly, even when I had a specific question and wanted to talk to someone, I used the online chat service to speak with a teller or just made a phone call.

More education meant more trips to the bank. Thirty-five percent of respondents with at least some college experience said they visited the bank within the last week, compared with 21 percent who had a high school education or less. – Bankrate

More education lines up with more income. If somebody has a lot of funds to shuffle around, of course they’ll be heading over to their bank’s branch. For large transfers, I suspect people find more comforting sitting down talking with someone at the bank versus just performing the transfer online.

Smaller incomes meant fewer trips to the bank. Among respondents who earn less than $30,000 a year, 29 percent said the last time they visited a bank was more than 12 months ago. That’s nearly twice as much as respondents who made $75,000 or more per year.              -Bankrate

Lastly, smaller income means fewer funds to shuffle around. With 34 million Americans “un(der)banked” (2011 numbers), the WSJ claims that these people are further hurt by their reliance expensive check-cashing services.

Overall its nice to see that 1/3 of Americans haven’t had to go through the trouble of visiting a bank in 6 months. I know I can’t speak for everyone, but visiting a bank is more like an errand or chore than it is an enjoyable event. As Bankrate.com’s chief financial analyst Greg McBride said “The number and location of bank branches, as well as their functionality, will continue to evolve, but clearly they’re not going away”. Though, evolving has meant that some branches are actually going away. But evolving is more about the shift to virtual banking that is indeed evolving the way we work with money across the country and the world.

Your Bank hasn’t seen you in a while!

Bankrate conducted a survey asking people: “When was the last time you visited a bank branch or credit union branch to conduct personal financial business?”

The results were not very informative though. I couldn’t find a chart of this question’s results over time,  (they didn’t ask this question in February financial security charts report). I did learn something by modifying the URL and going back through the financial security reports on their site. I found that every month they ask one oddball question.

Here are the interpretations from the data that Bankrate made. I will attempt to interpret them.

Highlights:

  • Younger people were less likely to visit their banks or credit unions. Only 19 percent of respondents between 18 and 29 years old said they visited within the last week, compared with 29 percent for those between 30 and 49 years old.
  • More education meant more trips to the bank. Thirty-five percent of respondents with at least some college experience said they visited the bank within the last week, compared with 21 percent who had a high school education or less.
  • Smaller incomes meant fewer trips to the bank. Among respondents who earn less than $30,000 a year, 29 percent said the last time they visited a bank was more than 12 months ago. That’s nearly twice as much as respondents who made $75,000 or more per year.

My Interpretation:

  • Younger people aren’t going to the bank for two reasons. (1) We have better things to do than visit the bank (2) We can all deposit our checks and view account info through an ATM, mobile app, or on the bank’s website. This has definitely been my experience. In fact, if I recall correctly, even when I had a specific question and wanted to talk to someone, I used the online chat service to speak with a teller or just made a phone call.
  • More education lines up with more income. If somebody has a lot of funds to shuffle around, of course they’ll be heading over to their bank’s branch.
  • Lastly, smaller income means fewer funds to shuffle around. With 34 million Americans “un(der)banked” (2011 numbers), the WSJ claims that these people are further hurt by their reliance expensive check-cashing services.

Overall its nice to see that 1/3 of Americans haven’t been to a bank in 6 months. As Bankrate.com’s chief financial nalayist Greg McBride said “The number and location of bank branches, as well as their functionality, will continue to evolve, but clearly they’re not going away”.

Federal Reserve Releases Results of Stress Tests

The results of the 2014 Federal Reserve’s stress tests on the nations leading banks and financial organizations were released to the public last week, providing an overview of the health of the U.S. banking system after the 2008-2009 crisis. The annual stress tests are designed to determine whether banks could withstand hypothetical shocks to the U.S. economy, such as a surge in unemployment or severe drop in housing prices, and be able to weather heavy losses during market turmoil. This year they found that 29 of the largest 30 institutions have stored enough capital to withstand the FED’s shocks; only Zions Bancorp, a regional lender based in Salt Lake City failed to make the minimum requirements.

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While the FED is notoriously secretive with the exact equations and data they use to construct their test and rank institutions, they release their framework and general methodologies on their webpage. One important ratio they use to determine the fortitude of a banking institution is called “Tier-1 Common Capital,” which is a ratio of the bank’s core equity capital to its total risk-weighted assets. Risk weighted assets are simply the total assets held by an institution weighted by their credit risk according to the FED’s formulas (which it does not release). According to the Wall Street Journal the FED has now defined the appropriate minimum value of the Tier-1 common capital of an institution to be 5%, which means that a bank needs to hold at least 5% of its risk adjusted assets in capital in case of a severely adverse scenario. This severely adverse scenario features a deep recession, rising unemployment rate, severe drop in housing prices and around a 50% decline in stock prices over nine quarters. According to the results presented in the Wall Street Journal, 30 banks would have suffered total loan losses of $366 billion, trading losses of $98 billion and a net loss before taxes of $217 billion. In other words, in order to ensure that the wealth of the bank’s customers is safe, a bank needs to have enough capital on hand to get through even the toughest of times. All except for Zions Bancorp met this minimum requirement, but certain banks such as Morgan Stanley and Bank of America, which are considered integral pillars of the financial system, just barely meet this requirement.

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This new information suggests that banks are much healthier than they were even a year ago, which should help inspire confidence in the U.S. financial system. Other information, such as the Chicago FED National Financial Conditions Risk Subindex suggests that overall levels of volatility and funding risk have dropped to near pre-crisis levels. Here, positive values indicate tightening, more risky financial conditions while negative values indicate loosening, less risky financial conditions. The current level around -1.0 suggests loosening financial conditions and a financial system that is beginning to appear safe once again.

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Since these risk measures all take expected risks into consideration, which is simply a probability of a negative financial outcome occurring in the future, there is still uncertainty in the results. For instance, one risk measure that regulators take into consideration in these stress tests is called Value at Risk (VaR) takes past market fluctuations into account when attempting to predict the future fluctuations. However, historical measurements of risk cannot predict future risk by themselves. If there are unknown risks in the markets these measurements may miss them. Therefore, any risk measurement, calculated by the FED or otherwise, must still be taken with a grain of salt and used to provide a general level of risk in the financial system, not an exact level.

Overall, it’s hopeful that the U.S. financial system is beginning to stabilize and that greater financial oversight by regulators including the FED alongside greater safety measures introduced by banks will reduce the risk of financial calamity after strongly adverse scenarios.

 

Hail to the Banking System

Today, newspaper headlines might not paint the most flattering pictures about the big banks. This combined with post Great Depression paranoia can make people feel uneasy about the entire system. From an investment side, people are aware of the risks that come with trusting an investment bank to make an asset grow.

People need to learn that they cannot believe everything they read. There is more than enough support for the claim that people should be trusting the banks. The Wall Street Journal and the Washington Post both have articles about the Fed’s “stress test” for the big banks. This test is designed to evaluate the financial health of these big banks and their resiliency during an economic slump. 29 of the 30 big banks passed this test. The only one that did not was Zions Bancorp. In other words, 29 of the 30 big banks will survive an economic crisis like the one that happened in 2008.

On CNBC, Thomas Donahue, the chief of the U.S. Chamber of Commerce praised the banking system. He supports the big banks from an ethical, financial and compliant perspective. He mentions that banks paid back money owed to the government plus the interest. He says that there may be bad people in the banking system, but that cannot mean that people should distrust the entire system.

I feel that I have a personal connection to this question at hand. My father used to work in financial law enforcement, He has come across a few bad apples in the past. Today he works at Goldman Sachs in anti-money-laundering. It is his job to keep his company out of trouble. My father is a reason why we can trust the banking system. He has told me about how all of these banks set an extremely high standard to trustworthiness and compliance.

With regards to the video and the two articles, the federal government is giving people reasons to trust this financial system. The Fed’s stress test is an important evaluator. The crisis of 2008 was the worst thing to happen since the depression. A big part of that was the failure of Lehman Brothers. This test determines if these big banks would collapse like Lehman did. If there was to be some sort of a collapse, 29 of these big banks would survive. If the chief of the Chamber of Commerce is defending the banking system, then what reason is there not to?

Financial Institutions Seek to Thwart Government Regulation

In wake of the Great Recession, the federal government has added many new regulations to reduce the risks banks are allowed to take. One of the new financial regulations laid down by the Consumer Financial Protection Bureau was enacted to force banks to be more careful about who they gave mortgages to, to limit the creation of toxic assets, which dragged down the economy in 2007-2008.  A consumer must now meet more stringent ability-to-pay requirement; a “qualified mortgage” is one “in which borrowers spend no more than 43% of their income on debt, and pay no more than 3% of the loan in fees and other charges.”

Banks not giving bad loans to people who don’t have the ability to repay those loans is a good thing.  In this regard, the government stepping in and establishing more strict regulations is a good thing.  On the other hand, bank should be able to lend to whomever they want, as long as they are risking their own money.  However, the fact is that often banks immediately sell their mortgages to a government sponsored enterprise (GSE), such as Freddie Mac.  GSEs then bundle and securitize these mortgages, selling them to investors.  This system allows banks to make more loans, and thus allow more people to buy homes, which is good for the United States economy.  When banks wrote bad loans in the mid-2000’s, and the creditors defaulted, the assets, which were held by many institutions began lose their values, and severely damage the economy.  Thus, in some sense, because of the way the GSEs buy mortgages (and the government implicitly acts as a safety net), banks are not always quite playing with their own money.

With the new regulations on what banks can and cannot do, many have shied away from being major players in the mortgage-servicing market.  A chief executive at J.P. Morgan Chase recently said, “If I had a choice, I would never be into bulk servicing again.”  Instead of the intended consequence that banks would simply be more careful with selling mortgages only to solid creditors, many major banks are shifting their funds away from mortgages.  Despite this move on the part of banks, the housing market is showing strong signs of recovery, and thus someone needs to write the mortgages for these home purchases.  This is where other financial institutions, those not subject to much of the new legislation come into play.

The market share of mortgage servicing rights of non-bank institutions has grown nearly 300% from 2011 to 2013, and in the most recently year the vast majority of new mortgage services rights went to non-banks. (Mortgage servicers handle payment and bill collection of a mortgage, for a fee).  In fact, governmental agencies have recently blocked a $39 billion mortgage servicing rights deal from Well Fargo, a bank, to Ocwen Financial Corp., the largest non-bank servicer, because of doubts that Ocwen can handle that many mortgages.  These doubts are well founded.  Ocwen recently settled a $2.1 billion suit with the CFPB and 49 states over poor practices, and other non-bank servicers have been under scrutiny for bad mortgage practices.

This situation makes me feel uneasy; it seems as though the institutions now starting to service loans are less reliable than the banks who previously did the task.  The new government regulations, which I believe had very good intentions, did not seem to work in the ways intended.  I find it somewhat shortsighted on the lawmaker’s part that they didn’t foresee banks fleeing this market when writing the law, which had lead to negative externalities.

This situation also highlights both the positives and negatives of the free market.  The market is clearly working because companies with less incentives to service loans due to new regulations (i.e. banks), are leaving the market and letting other firms do it more profitably.  However this turnover has lead to decreased product quality, because it’s a profit-at-any-cost business, and I believe this is bad for consumers.  Perhaps one of the inherent problems in this situation is the political non-feasibility of incentivizing banks to write good loans.  Since the government can’t incentive good loan practices well, large banks are just not servicing mortgages.  As I noted in a previous blog post, I would like to see a more efficient solution between the government and banks, which would probably require a comprise, and unfortunately this seems unlikely.

Don’t Get Too Excited With Spain

This past Thursday, Spain began its halt and its reliance on bailout loans from Europe. After the construction sector had its fall out, Spain was in desperate need to fill up the vaults in its banks. While some critics still believe Spain is in its rock bottom pit, some people the Spanish job market may be turning around. “Spain posted seasonally adjusted job growth for the first time in nearly six years.” Officials and independent analysts say “the job-growth threshold is lower now because of a two year old overhaul of labor laws that made it easier and cheaper to lay off workers.” But now, according to Gayle Allard, a professor at IE Business School in Madrid says “companies are as likely to hire because the lower dismissal costs have diminished the risks associated with taking on new workers.” Companies have been seeing an increase in demand from an increase in requests for new employees and workers seeking jobs. As we see the Spanish banks ending their need of loans from Europe, there is progress in the works for Spain.

Although a lot of people have been inspired by the progress of Spain, many economists are not completely convinced that there will be a complete upswing. Why should we be completely confident that there will be a full turn around just cause the banks aren’t taking loans anymore?  Megan Greene, the chief economist at Maverick Intelligence in London says that “The big game that politicians and bank CEOs are playing is ‘extend and pretend.’ If we pretend that our banks are really healthy, then eventually all the assets underlying things on our balance sheets will regain value, and we won’t actually have to take such big losses.” This is the exact reason why countries like Spain and Greece have been in the dumps for the past several years. They have continued to believe things will work themselves out without any major changes. Spain thinks that not having to take bailout loans from Europe is one of their big moves and that the rest of their issues will work out themselves. “So that’s the game everyone in Europe has been trying to play,” Greene continues to say.

Even the job market doesn’t look like it will have the best outcome as some people have been saying. “More than 90% of the new jobs are temporary, some say, and part-time contracts are also increasing.” So yes, it is easier to hire people just as it was easy to let people go, but that does not mean Spain is making great progress. For there to be a complete turn-around in Europe, all the countries are going to have to figure out a way to come together to fix their economies. I do not believe one country will be able to solve their problems on their own. There is too much chaos still occurring in Europe for a major progression to come about.

Banks Are Back.

Just a few thoughts on the reemergence of banks being a viable investment option as well as a sign of a continually strengthening economy. I give forewarning that I do not completely understand their entire business model due to the outrageous complexity of some of them (yes it is more than deposits and loans).

First off it is a graphic from WSJ that struck me, showing just how long it has been since some of these banks have turned profits as well as highlighting just how bad the economic downturn in ’08 was. Credit to WSJ.

Bank Profits Pre 08 to Present

 

According to the WSJ article these banks collectively made around 76 billion dollars in profits this past year which is the highest since 2006 when housing prices peaked. (WSJ) It is also worth noting that the interest rate scenario while not horrible but still sub 3% on the 10 year treasury bill for most of the year makes it hard for these companies to turn profits. This is one of the main reasons for such excitement about both the US economy and these banking stocks in 2014, because as the Fed takes its foot off of the gas, (repeat the “tapering is not tightening” mantra over and over here) these banks will have much better room to operate and make sizeable profits in a rising rate environment. It is also worth nothing that banks like Citigroup trade for less than their book values in this environment as well!

The future does certainly look bright for these banks especially if the economy keeps on the track that it does, but there still are hurdles to be jumped by most of the “big six”. Earlier this week Citigroup reported their quarterly earnings (and got punished) for missing the wall street consensus EPS (earnings per share) due to smaller profits in their fixed income trading units, mortgage units, and most notably legal costs. (Yahoo) This is where things get interesting, many of the banks are still dealing with legal charges stemming from before the crisis and their involvement in the trading of CDO’s, MBS’s, etc. While many CEO’s (Morgan Stanley’s for instance) would have you believe that they are making “substantial moves to address pre-crisis measures” (WSJ) banks like Citigroup openly admit to anticipating higher legal costs in upcoming quarters. Admittedly, Citigroup has Libor Rate and FX manipulation to deal with (another post certainly), I find it striking that substantial settlements by Morgan Stanley do not openly invite more “clients” to come out of the woodwork looking for their own settlement if they now know how Morgan Stanley is taking care of business.

While there are challenges, the future looks extremely bright for these banks who have cut overhead costs, reduced payrolls, etc in an attempt to become more clean cut and efficient in todays financial world. Barring any “black swans” in 2014, the banks should be poised for another terrific year.

Detroit’s Rock Bottom

As a die-hard Tiger’s fan and living in the suburbs of Detroit all my life, I’ve seen the bad and I’ve also seen rock bottom. This past July 2013 the city of Detroit went into Chapter 9 bankruptcy, with an estimated $18 billion in long-term obligations. Before the bankruptcy, Emergency Manager Kevyn Orr, who is responsible of overseeing Detroit’s financial operations was given a great amount of control and had the ability to recommend to the governor and state treasurer to enter bankruptcy. Throughout the winter months Orr has continued to find ways to alleviating debt for restructuring.

Recently, Orr and lawyers for two banks have mediated together to reach “more favorable terms for terminating a pension debt deal some blame for plunging Detroit into bankruptcy.” Leading the mediation talks in Detroit’s bankruptcy, Judge Gerald Rosen, ordered banks and bond insurers to negotiate a deal to free up money for restructuring. And if these deals can’t get done, the city has threatened to sue UBS AG and Bank of America’s Merrill Lynch Capital Service. With these negotiations in place, the city is looking for the banks to lower the swap settlement and Detroit would pay the banks 75 cents on the dollar. “If the banks agree to lower settlement amount, it could give the city more money for ‘quality of life’ improvements.” However these swaps are also calculated based on increasing interest rates to protect the city, which is why many groups were very strongly opposed to the deal.

However, in lieu of all the continuous mediations and work that Kevyn Orr is going through, there are some favorable groups relieving some stress with Detroit’s financial problems. Just this Monday the city got a $330 million boost from some of the nation’s leading foundations. While these nine foundations have promised to help pay the city, “in turn, the city could use the proceeds to help make up the shortfall in its municipal pension system,” which is estimated at $3.5 billion. “A recent valuation of the city-purchased portion of the DIA collection estimated it was worth as much as $866 million.” These works of art include van Gogh, Bruegel, and Michelangelo.

Mr. Orr pointed out in a statement Monday saying, “This is a very important step, but there is still much work to do.” Detroit has officially passed through the bottom of the trench it once sat in. Talks of cutting debt, paying off creditors and reinvesting in crime reduction efforts have been aided to help finish their plans with these tremendous foundations. While the city tries to keep cutting its debt, it will allow other areas to prosper in the city. I believe that in 10 years or so, Detroit will have been the place to have already lived for the past 2 years. Living 10 minutes away from Downtown Detroit, there is truly a different atmosphere in the area. For those who are not from the Detroit area, you will just have to wait and see. As Detroit looks forward, the continuous effort of innovation and help from the great foundations who have recently donated will help bring Detroit to its feet once again.