The no part – Majority of banks haven’t written down/recognized problem loans and don’t have enough in reserves to cover needed writedowns. This is based on where we are today. If the economic conditions improve and real estate in particular appreciates, then some of the losses could be avoided. At the same time, real estate prices could definitley fall more.
The yes part – The Fed has taken rates to 0%. We actually have negative interest rates right now. This means you get 0.5% on a 1 yr CD and inflation over 1 yr is 2%. The money in the CD with interest after 1 yr is worth less in terms of purchasing power as compared to the initial investment today. Nearly 100% of all bank deposits have a maturity less than 1-2 yrs. The rates were taken down about 18 months ago, so almost 100% of deposits (bank liabilities) have repriced to these low levels. On the other hand most banks hold 40%+ of earning assets that have fixed rates. Most banks government guaranteed bond portfolios yield around 5%. Many loans are fixed rates. The Fed has created an arbitrage that is recapitalizing many banks. They have created higher net interest margins. In short, they are robbing the depositor. It is very real.
It’s basically a ploy to make banks that were/are really insolvent, solvent over time. Not to mention as a way to make profits, considering there isn’t alot of prime loans to make in this type of economic environment. As of a couple of months ago, you could borrow from a depositor or the Fed at 0.25% and place in a 10 yr Treasury at 4%. That’s manufactured profits, but real for the time being.
- okinvestor
