The Phaserl


Will Your Bank Survive the Coming Financial Crisis?

by Doug Casey, Casey Research:

Banks are “reaching for yield.”

You’ve probably heard us use this phrase. We normally say it when we’re talking about investors who buy risky assets in hopes of getting a decent return.

You see, it’s become very hard to earn a decent return in bonds over the last few years.

The U.S. 10-year Treasury is a perfect example. From 1962 to 2007, 10-years paid 7.0% per year on average. Today, they yield just 1.6%.

Government bonds from England to Japan are also paying record-low interest rates. Many corporate bonds and municipal bonds yield next to nothing too.

Dispatch readers know rates didn’t get this low on their own. Central banks put them there. Since September 2008, central banks have cut rates more than 650 times. Global rates are now at their lowest level in 5,000 years.

You almost have to own risky assets to have any shot at a decent return these days. That’s why investors have loaded up on stocks, which are generally riskier than bonds. It’s why folks have piled into high-yielding “junk bonds,” which are issued by companies with poor credit.

Banks have the same problem. To make money, many have to make risky loans.

Today, we’ll show you how banks are reaching for yield. As you’ll see, this reckless practice could steer the world toward a full-blown banking crisis.

• Low interest rates have made it hard for banks to make money…

Banks make money by charging interest on loans. They’ve been doing this for centuries. But, with rates near record lows, many banks are struggling to get by.

According to Financial Times, the net interest margin for major U.S. banks is at the lowest level in decades. Net interest margin is a measure of bank profitability.

European banks are hurting too. Second-quarter profits at HSBC, Europe’s biggest lender, fell 45% from a year ago. Spanish banking giant Banco Santander’s second-quarter profits fell 50%. At Deutsche Bank, profits plunged 98%.

• Banks are making risky loans to offset low interest rates…

Financial Times reported last month:

US banks have ramped up lending to consumers through credit cards and overdrafts at the fastest pace since 2007, triggering concerns that they are taking on too much risk in a slowing economy.

According to Financial Times, U.S. banks increased credit card lending by 7.6% last quarter.

At Wells Fargo (WFC), credit card loans jumped 10% from a year ago. Citigroup’s (C) credit card business grew 12%. And SunTrust (STI), a regional bank in Atlanta, grew its credit card loans by 26%.

• Banks make huge fees from credit cards…

The average annual interest rate for U.S. credit cards is between 12% and 14%. Some charge more than 20%. For comparison, the average home mortgage in the U.S. has an annual interest rate of about 3.5%.

Right now, banks are using credit cards to lift their sagging profits. According to Financial Times, they’re making “lavish offers” to get folks to take out credit cards:

The industry has piled on about $18bn of card loans and other types of revolving credit within just three months, as consumers borrow more and banks battle for customers with air miles, cashback deals and other offers.

Even worse, banks are recklessly lending to people with shaky finances and low credit scores. CNBC reported last week:

Ten million new consumers entered the credit-card marketplace in the last year alone…

Just over half of the originations came from millennials in their 20s opening their first card. Including those accounts, 60 percent of new customers were subprime borrowers, meaning those with a credit score of 660 or below.

• If this sounds familiar, it’s because lenders did the same thing during the last housing boom…

During the early 2000s, the U.S. housing market was on fire. Many lenders thought home prices would “never fall.” So they issued millions of mortgages to people with bad credit.

When housing prices crashed, subprime borrowers defaulted on their loans. The collapse of the housing market triggered the 2008 financial crisis.

Banks are now making the same mistake with credit cards. This hasn’t been a problem so far. According to The Wall Street Journal, delinquency rates for credit cards are at the lowest level since 2003. But that could soon change…

• U.S. banks are bracing for huge losses…

Financial Times reported last month:

Synchrony Financial, the largest supplier of store-branded cards in the US, sent a shudder through the sector in June when it increased its forecast for credit losses.

Capital One added $375m to its loan loss reserve for its domestic card business, according to Barclays, while JPMorgan Chase added a $250m loss allowance for its credit-card portfolio.

In other words, major U.S. banks have set “rainy day” funds in case credit card defaults surge. But most banks have no idea what’s about to hit them…

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