The Bankwatch

Tracking the consumer evolution of financial services

The Economic Outlook for 2009 and Community banks | Yellen SF Fed

Economists, even good ones, can sometimes state the obvious and leave a sense that the impossible can actually occur, which of course it will not.

    The Economic Outlook for 2009 and Community Banks  Delivered February 6, 2009 in Hawaii | Janet Yellen, CEO, Federal Reserve Bank of San Francisco

    It’s also important to acknowledge that banking organizations find themselves under intense scrutiny and are subject to conflicting pressures. At a time of nearly unparalleled challenges for financial institutions, you find yourselves called on simultaneously to preserve capital, avoid excessive risk, and step up your lending. Policymakers are mindful how difficult it can be to balance those mandates.

    There are some dire predictions in this piece.  In any event it is a reasonable summary of the conditions that Community banks in particular in the US face.  I have pasted fairly extensively but bolded some key highlights for ease in locating points of interest. Note the reference to ‘systemically important” banks, and “removal of bad assets” which point in the direction of the large banks becoming financial utilities.

    1. “Households are hunkering down. The personal saving rate has jumped from around zero early last year to about 3½ percent recently, as people have tried to rebuild lost wealth and some cushion to weather adversities, including possible job loss.”
    2. On residential development:  Unfortunately, there is no end in sight. Housing starts have plummeted over the past year, falling by nearly one-half. It’s hard to see when starts will bottom out, since inventories of unsold new and existing homes remain at high levels relative to sales.
    3. On house prices:  Unfortunately, futures contracts for house prices suggest that further declines are likely this year and next
    4. With regard to credit, many companies, especially those with lower credit ratings, must now pay extraordinarily high rates in the bond market
    5. The market for commercial mortgage-backed securities has all but dried up. Banks and other traditional lenders have also become less willing to extend funding.

    On Banks:

    1. To fulfill our role in providing liquidity, we have crossed traditional boundaries by extending the maturity of loans, the range of acceptable collateral, and the range of eligible borrowing institutions
    2. It will support the issuance of securities collateralized by auto, student, credit card, and SBA, or Small Business Administration loans—sectors where the issuance of new securities has slowed to a trickle. This approach has the potential to be expanded substantially, with higher lending volumes and additional asset classes, such as commercial mortgage-backed securities.
    3. guarantees against losses for several systemically important financial institutions including Citigroup, Bank of America and AIG
    4. A lesson from past experience with banking crises around the globe is that the removal of bad assets from bank balance sheets, along with the injection of new capital, is needed to restore health to the banking system. As long as hard-to-value, troubled assets clog their balance sheets, banks find it difficult to attract private capital and to focus on new lending.
    5. As a result, and given the outlook for the economy, I would expect to see more deterioration in corporate, commercial real estate, and consumer portfolios over the course of this year and into next year
    6. Many community banks have significant commercial real estate concentrations, and these loans are a particular concern in the current environment. At present, the performance of such loans has deteriorated only mildly. But, as I suggested earlier, we can’t count on that situation to continue, since the downturn in commercial real estate construction is just getting started

    Written by Colin Henderson

    February 27, 2009 at 01:33

    %d bloggers like this: