Unfortunately looking at the 2Q2009 industry stress distribution numbers based on the latest FDIC research master file the numbers tell a tale of doubt. Table 1 shows the population distribution of IRA bank stress indices computed over the weekend. The data includes every active bank in the United States for the end of 2Q.
|Table 1: IRA Bank Stress Index (BSI) Grade Distributions|
At first glance you might not see much change. The return to 2008 reveals dramatically looking at the asset values of the institutions in each stress bucket. One does indeed see a bump of improvement at the end of 1Q2009 no doubt due to the combined gallant efforts of the administration and the one before it. But I have to report with what I will admit is a sinking heart that it's all but evaporating according to the second quarter results. We are back to the stress patterns of 2008.
|Table 2: IRA Bank Stress Assets Distributions|
So where are we? Where are the big banks in all this one might ask? Generally, that would be them beginning to pile up in and around column B country. The regional and community banks remain split in a barbell pattern that's been emerging for some time.
Mission Element Need Assessment
Any analyst who isn't in complete denial about being on planet earth should clearly see at this point that a one size fits all unified theory of problem solving is a load of hooey. We now have on our hands a much more complex battle with at least three elements that need to be maneuvered cleverly if this is to turn out alright.
The A+/A's are our economy's anchor. We need to make sure they are advantaged to capture market share and rebuild our foundation to good operating standards. They aren't necessarily the politically connected. But I do not believe the other two legs of banking can survive without them. Left to me, this is where I'd design the most favorable incentives to encourage private investments. Why here? Because it creates implied financial forces to herd the other two groups towards safer and sounder outcomes.
The B/C banks are the one's still carrying excess leverage from the prior business cycle. We need to bring them back to earth in a controlled fashion. Destroying them is not an option. Though wounded, they are still a tool with a real purpose in our economic landscape. Rather, we need to mend and reposition them so that their penchant for chasing great opportunities can be recycled to help power the next leap of the American dream.
The D/F banks are the great turnaround opportunity of our economy. These are the institutions whose business models have become so mismatched to current conditions that it's showing in red ink net incomes, hazardous exposures to government advances, and unsightly loan loss scenarios. These are the banks that will require the iron hand of the Banking Act reborn to restore discipline to safe and sound principles. Turn them around we must for the sake of our own peace of mind. Mark my words, for each 5% of them we fix we'll feel a quantum of joy better about life in these United States.
The search for solutions goes on.