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12-20-2013, 10:35 PM
What happens to banks? balance sheets during a downturn?
By Sober Look (http://soberlook.com/)
Credit underwriters pride themselves in their ability to cut lending when they sense that eco**mic fundamentals have changed for the worse. For example one often hears bankers talking about passing on deals in 2007 because of “**t liking the fundamentals” or “the markets looked stretched”. But historical data suggests otherwise. At least during the past 6 downturns, lenders increased balance sheets during the onset of each recession. And loan portfolios continued to grow, with lending often slowing only closer to the end of (and/or after) the recession.
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http://3.bp.blogspot.com/-r_4KljmH4-0/UrDCnEkkfQI/AAAAAAAAdRs/AmELCE_PjaU/s1600/Loans+and+Leases+during+recessions.PNG (http://3.bp.blogspot.com/-r_4KljmH4-0/UrDCnEkkfQI/AAAAAAAAdRs/AmELCE_PjaU/s1600/Loans+and+Leases+during+recessions.PNG) Above the red line (100) indicates an increase since recession’s start (source: FRB) But banks continue to insist that they will see the next recession coming and reduce exposure before the downturn. These “expected” balance sheet declines have been reflected in the stress tests that banks have been providing to the Fed, resulting in a more benign outcome. Given that the data clearly shows balance sheets rising, the Fed has decided to apply its own assumptions to how banks’ loan portfolios will change in the next downturn.
WSJ (http://online.wsj.com/news/articles/SB10001424052702304173704579262702319332432): – The Fed will **w make its own projections about how bank balance sheets will fluctuate during a future recession, rather than rely on the banks for that data. The change is likely to produce different results in the 2014 tests, the Fed said. For instance, the central bank is likely to find bank assets will grow in a downturn, rather than contract as banks had projected in previous years. That could require firms to have more loss-absorbing capital or limit rewards to shareholders, though results will vary for each bank.
It seems that in reality, lenders (at least on average) tend to be terrible at calling the next downturn. And often by the time underwriting standards actually tighten, the worst of the slowdown is already over.
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What happens to banks’ balance sheets during a downturn? (http://www.creditwritedowns.com/2013/12/what-happens-to-banks-balance-sheets-during-a-downturn.html) originally appeared on Credit Writedowns (http://www.creditwritedowns.com)
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By Sober Look (http://soberlook.com/)
Credit underwriters pride themselves in their ability to cut lending when they sense that eco**mic fundamentals have changed for the worse. For example one often hears bankers talking about passing on deals in 2007 because of “**t liking the fundamentals” or “the markets looked stretched”. But historical data suggests otherwise. At least during the past 6 downturns, lenders increased balance sheets during the onset of each recession. And loan portfolios continued to grow, with lending often slowing only closer to the end of (and/or after) the recession.
*
*
http://3.bp.blogspot.com/-r_4KljmH4-0/UrDCnEkkfQI/AAAAAAAAdRs/AmELCE_PjaU/s1600/Loans+and+Leases+during+recessions.PNG (http://3.bp.blogspot.com/-r_4KljmH4-0/UrDCnEkkfQI/AAAAAAAAdRs/AmELCE_PjaU/s1600/Loans+and+Leases+during+recessions.PNG) Above the red line (100) indicates an increase since recession’s start (source: FRB) But banks continue to insist that they will see the next recession coming and reduce exposure before the downturn. These “expected” balance sheet declines have been reflected in the stress tests that banks have been providing to the Fed, resulting in a more benign outcome. Given that the data clearly shows balance sheets rising, the Fed has decided to apply its own assumptions to how banks’ loan portfolios will change in the next downturn.
WSJ (http://online.wsj.com/news/articles/SB10001424052702304173704579262702319332432): – The Fed will **w make its own projections about how bank balance sheets will fluctuate during a future recession, rather than rely on the banks for that data. The change is likely to produce different results in the 2014 tests, the Fed said. For instance, the central bank is likely to find bank assets will grow in a downturn, rather than contract as banks had projected in previous years. That could require firms to have more loss-absorbing capital or limit rewards to shareholders, though results will vary for each bank.
It seems that in reality, lenders (at least on average) tend to be terrible at calling the next downturn. And often by the time underwriting standards actually tighten, the worst of the slowdown is already over.
More About: balance sheet (http://www.creditwritedowns.com/tag/balance-sheet/), banks (http://www.creditwritedowns.com/tag/banks/), capital (http://www.creditwritedowns.com/tag/capital/), credit (http://www.creditwritedowns.com/tag/credit/), Financial Institutions (http://www.creditwritedowns.com/category/financial-institutions/), recession (http://www.creditwritedowns.com/tag/recession/), weekly (http://www.creditwritedowns.com/tag/weekly-2/), writedowns (http://www.creditwritedowns.com/tag/writedowns-2/)
The most in-depth research and analysis is on Credit Writedowns Pro (https://www.creditwritedowns.com/members/).
What happens to banks’ balance sheets during a downturn? (http://www.creditwritedowns.com/2013/12/what-happens-to-banks-balance-sheets-during-a-downturn.html) originally appeared on Credit Writedowns (http://www.creditwritedowns.com)
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Credit Writedowns Feed # abf0d081857b85fe6be494728740a4f1
Related posts:
Banks benefiting from “taper” on both sides of the balance sheet (http://www.creditwritedowns.com/2013/07/banks-benefiting-from-taper-on-both-sides-of-the-balance-sheet.html)
Europe’s banks must be recapitalized (http://www.creditwritedowns.com/2013/06/europes-banks-must-be-recapitalized.html)
Chart of the day: Does this violate key principles of money creation? (http://www.creditwritedowns.com/2013/06/chart-of-the-day-does-this-violate-key-principles-of-money-creation.html)