Banking difficulties

1 ° Losses (write-downs and losses) for 2007-2010

The banking difficulties are explained by the volumes of losses on the assets held. These losses were estimated by the Financial Stability Report in October 2008 and again in April 2010. We will only consider the April estimates.
For the banking sector, losses on loans and financial investments in securities (equities, bonds, securitization products) amounted to $ 885 billion, or 7% of total financial assets. It will take several years to absorb similar losses.

In loans, the crushing weight of losses is primarily the fact of mortgages and consumption (43.4% of 66, 5% of total losses). In investments, securitized residential mortgages account for the lion’s share: 18.8% of the 33.5% loss.

Adding real estate mortgages (Residential and Commercial) securitized or not, they account for 57% of total bank losses. As for securitization products, they account for only 24.2% of this total. It is, therefore, the real estate crisis that is the main cause of the banking crisis; securitization is not the dominant factor in this crisis, it played only the role of amplifier.

2 ° Past and anticipated losses of banks.

As shown in the chart, the losses and write-downs that gave rise to the training, provision for covering them are far from halted. Provisions made were already close to $ 700 billion for the 2007 period from the second quarter of 2007 to the last quarter of 2009 (green on the graph). They will remain for 2010 at a level roughly equal for US banks. These losses are expected to decrease sharply only after 2012 as shown in the provision for losses chart.

3 ° The weight of the losses and depreciation of receivables in the total assets

The share of bank loans in total losses, 66.5 (against 33.5% for investments) will continue to weigh heavily in the formation of provisions. The rate of charge-off rates will remain at levels of concern in the near future. Provisions on residential mortgages will increase until mid-2011, their decline will not be significant before 2012. Debt consolidation loans will increase until 2012, no decline will be significant before 2013, even 2014. Provisions for industrial and commercial credit and consumer credit could have peaked in 2010, but their decline will remain very slow: For consumer credit, the decline will be reported in 2013; for commercial and industrial credits, the end of 2011 could mean a real improvement of the situation. In short, the losses will remain sensitive in 2011-2012 and a return to a less negative situation will have to wait until at least 2013.

By extension, we can guess what will happen to the losses resulting from financial investments when we know that these losses are already concentrated on residential mortgages and securitized commercial mortgages.

For the simple residential real estate sector, the growth of the payment defections speaks volumes about the seriousness of the housing situation in the US. Payment delays continued to explode throughout 2009. The foreclosure procedures did not follow this downward path as the Obama administration encouraged by all means negotiations between creditor and debtor leading to negotiated refinancing formulas. The decline in deportation procedures does not mean a stopping of the deterioration of the repayment capacity of American households. The deterioration has been adjusted, the defaults – still as strong as mass unemployment – continue to increase.

4 ° The set of payment defaults at T-1 2010.

The latter chart would draw attention to the persistence of credit incidents and the credit risk of any relapse of the “recovery”. The commercial real estate and residential real estate defaults continue to be at very high levels. However, commercial loan defaults are down slightly (T-4 2009 & T-1 2010), while incidents involving residential mortgages remain on the rise. The total amount of defaulting real estate assets continues to increase. They constitute the bulk of bank claims and financial investments of banks.

Consumer loans – of which credit cards are a part – have softened. Commercial and industrial loans, in turn, recorded a slight decrease in insolvencies in Q1 2010 as well as leases and leases. It is the translation of the “recovery” that also benefits the agricultural sector or the downswings fall.

The most recent developments in credit incidents in the US show that bank debtors remain globally a threat to them. The situation is at T-1 is a little bit better, but the heart of loans and financial investments – the real estate sector – remains a major risk for the banking system. The current level of failures recorded by the EDF confirms the IMF’s expectations: it will take several years for the banks to return to a normal risk situation and their accounts are no longer degraded by them: the payment incidents measured by the delays in payments will remain strong or sensitive until the end of 2012.