Friday, July 30, 2010

Q2 GDP Growth at 2.4 Percent – Consumption Growth Still Modest

Second quarter real GDP growth came in at 2.4% annualized rate. This followed an upwardly revised first quarter growth rate of 3.7% (previously 2.7%). The first quarter upward revision was balanced out by downward revisions to growth in the second half of 2009. The economy continues to grow, however, the rate of growth is slowing down. On a year-ago basis, real GDP grew 3.2%.

The quarter’s growth was primarily driven by a solid increase in fixed business investment. The equipment and software component was particularly strong, though non-residential construction also added to growth slightly. In total, non-residential fixed investment added 1.5 points to GDP growth. Consumption continued to grow, but only modestly, adding 1.2% to growth. Likely in part due to fallout related to the European sovereign debt crisis, net exports were a huge drag on growth for the quarter, taking 2.8% off of the total as imports grew far quicker then exports.

As in past quarters, inventory investment continued to add significantly to growth, adding 1.1 points to the total. However, this is a deceleration from the prior two quarters which added 2.6 and 2.8 points to growth. Real final sales, which removes the effects of inventory investment in order to obtain a measurement of current aggregate demand, rose 1.3%. This compares to a growth rate of 1.1% in Q1. The inventory readjustment phase in the early stage of recovery is coming to an end and growth moving forward will track real final sales more closely. As such, without greater improvement in consumption growth, GDP expansion will likely be quite modest in the upcoming quarters and unable to really drive the unemployment rate downward.

Source: Bureau of Economic Analysis

Thursday, July 29, 2010

Price Fixing on Interchange Fees Hurts Small Businesses

Today, a community banker, Robert Oeler from Dollar Bank in Pennsylvania, gave testimony in the House Small Business committee about how the Durbin Amendment will affect his bank. Here is what he had to say. I couldn’t agree more.

Any changes to the interchange system will impact all small businesses – small banks included. The vast majority of banks in our country are community banks – small businesses in their own right. In fact, over 3,200 banks and 6,100 credit unions have fewer than 30 employees…

The Durbin Amendment, which was added to the bill without any hearings, limits consideration of many important costs of providing debit cards and does not even allow for a reasonable return on investment. Such uneconomic pricing will hurt my ability to offer reasonably-priced banking products to consumers and small businesses in my community. Let me illustrate this: Last year, we processed 16 million debit card transactions and made less than $3 per month for each debit card. This revenue is important, but does not cover our costs of maintaining a transaction account which run between $12 and $15 per month. Without this income, it becomes very difficult for many banks to continue to offer low and no-cost checking for our customers.

The loss of revenue has other impacts as well, including making it harder to make loans. This is even more pronounced for Dollar Bank, since we are a mutual. The only way we can raise capital is through retained earnings. If we lose interchange income, it means that we will be unable to make as many loans in our community. In fact, if we see at Dollar Bank a 50 percent reduction in after-tax income on interchange it means 200 fewer small business loans can be made each year – year after year. For the industry as a whole, a 50 percent loss of interchange income would mean that lending could fall by as much as $74 billion.

For the complete written testimony, click here.

For the complete hearing record, click here.

Wednesday, July 28, 2010

Case-Shiller Index: Existing Home Prices Rise 1.3%

According to the twenty-city Case-Shiller Index, existing home prices rose in May by 1.3% on a non-seasonally adjusted basis. The ten-metro area index rose by 1.2%. This was the second consecutive month of price appreciation. Of the twenty metro areas, only Las Vegas saw home price declines over the month. From a year prior, the ten-city index was up 5.4% and the twenty-city index was up 4.6%. This is a new cyclical high and is the fourth consecutive month for both indices where the year-over-year change was positive.

10.07.27 (Source: Standard & Poor’s)

Tuesday, July 27, 2010

Conference Board Consumer Confidence Index Falls by 3.9 Points

According to the Conference Board Consumer Confidence Index, consumer confidence fell in July for a second consecutive month, declining 3.9 points to 50.4. This places the index at its lowest level since last February. The month’s decline was primarily driven by the future expectations component of the index, which fell 6.1 points. Future expectations have fallen sharply over the past two months. The current conditions component also fell, but by a lesser 0.7 point. Consumers, who had been gaining in confidence through the winter and early spring months, have now started to become more pessimistic about the future.

10.07.27 (Source: Conference Board)

Monday, July 26, 2010

What does the Dodd-Frank Act do to the FDIC Transaction Account Guarantee (TAG) Program?

The Dodd-Frank Act includes provisions related to the Transaction Account Guarantee Program (TAG). For participating institutions, the TAG Program currently provides unlimited FDIC insurance coverage for transaction accounts, IOLTAs, and NOW accounts that pay less than 25 basis points. Below are some of the most common questions regarding the future of the TAG program.

Does the Act extend the TAG Program?
The Dodd-Frank Act provides unlimited FDIC insurance for noninterest-bearing transaction accounts in all banks effective on December 31, 2010 and continuing through December 31, 2012. The current FDIC TAG Program – which continues to the end of this year – is not changed by this Act. While the FDIC did give itself the option, if conditions warrant, to extend the TAG Program again into 2011, this new law would make such a decision moot. Thus, while this new two-year coverage picks up where the current TAG program leaves off, there are important changes to the coverage which are discussed below.

Does the Dodd-Frank Act provision mean any changes for banks currently in the TAG Program?
No. Banks that have remained in the TAG Program (i.e., did not opt out) will still have the same coverage under that program through the end of this year and will still pay for the extra coverage at the same rates as before through the end of this year. Those banks that opted out of the TAG Program will not have any coverage of noninterest-bearing transaction accounts (above the standard $250,000 level) until next year, when all banks will be subject to the new law.

Do banks need to opt into or out of the TAG Program for next year?
No. The Dodd-Frank Act provides FDIC coverage for all noninterest-bearing transaction accounts in all banks for 2011 and 2012. Banks do not have to opt into this program, nor can they opt out.

Is the extra coverage under the Dodd-Frank Act the same as under the TAG Program?
No. For banks that are in the current TAG Program, there is unlimited FDIC coverage for noninterest-bearing transaction accounts, as well as for NOW accounts (where the interest rate is contractually limited to no more than 25 basis points) and Interest on Lawyers Trust Accounts (IOLTAs). The extra coverage provided for in the Dodd-Frank Act in 2011 and 2012 includes only transaction accounts that pay no interest; it does not include any interest-bearing NOW accounts or IOLTAs.

What are the premiums for the coverage provided under Dodd-Frank Act?
The unlimited FDIC coverage of noninterest-bearing transaction accounts will no longer be a special program; rather, it will be part of the standard FDIC insurance coverage for 2011 and 2012. Therefore, based on preliminary discussions with the FDIC (which can change, of course), we expect that the coverage will be included as part of the regular quarterly risk-based premiums, i.e., there will not be any special “add-on” premiums or fees for this coverage as are currently being charged for the TAG Program. However, if bank failures cost more due to this coverage, the extra cost will be borne by all banks and will be paid through their regular quarterly risk-based premium assessments.

What disclosures will be required?
The FDIC will promulgate rules for disclosures related to this program. After the TAG Program expires at the end of 2010, banks will no longer be required to post notices in their lobbies or on their websites stating that they are or are not participating in the program and listing the accounts covered by it. However, all banks will be required to amend their standard disclosures to make clear that FDIC coverage is provided up to $250,000 and, during 2011 and 2012, unlimited for noninterest-bearing transaction accounts.

Importantly, the Dodd-Frank Act removes the prohibition on payments of interest on demand deposit accounts as of July 21, 2011 (i.e., one year after the date of enactment, July 21, 2010). (See Dodd-Frank Act §627.) Thus, should a depositor or a sweep account shift money (in excess of the permanent $250,000 limit) from a noninterest-bearing transaction account to an interest bearing demand deposit account, the over-$250,000 FDIC insurance coverage would cease to exist. Disclosures notifying the customer of this change would be required (and we expect the FDIC to promulgate the rules and expectations for this).

A downloadable TAG Program Q&A is available here and in the Documents of Interest column on the right.

New Home Sales Jump 23.6% – Sales Remain Volatile

New home sales shot up 23.6% in June to an annualized pace of 330,000 units. This follows a downwardly revised sales pace of 270,000 units in May (previously 300,000). Sales have been very volatile in recent months primarily due to the effects of the homebuyer tax credit which expired in April. Sales rose sharply in March and April as buyers rushed to take advantage of the credit. Following this rush, sales fell back down in May eventually beginning to recover in June.

The cumulative rise of sales off of the prior trend in March and April was about the same magnitude as the decline in sales in May and June. This suggests that the vast majority of sales that were driven by the tax credit where not newly induced buyers. Instead, it is likely that many buyers who would have purchased a home in later months simply moved their purchase forward by a couple months to take advantage of the credit.

The median sales price has likewise been volatile in recent months. Prices fell 14.5% in April as homebuilders likely discounted prices in order to clear inventory before the credit ended. In May, prices jumped back 11.6%. Prices fell 1.9% in June to $214,500. It is likely that homebuilders discounted their prices in April in order to move inventories while the credit still existed. The median sales price was down 3.0% from a year earlier.

With the increase drop in sales, the months supply of inventory of homes for sale declined to 7.6 from 9.6. The historical norm is about 4.5 to 5 months. Before it can be certain the prices have stabilized, this ratio will likely have to find its way back to this area.

10.07.26 (Source: Census Bureau)

Friday, July 23, 2010

Falling Mortgage Rates Setting Off New Wave of Refinancing

Mortgage rates continue to set new record lows. According to the Fed, the average 30-year mortgage rate hit 4.57% last week. Rates have been pushed down about 70 basis points since the Greek sovereign debt crisis this past Spring. The market uncertainty boosted investor appetite for US Treasuries due to the “flight to safety.” This, coupled with a general sentiment that the US economic recovery will be slower than previously anticipated, has had the effect of driving down long term interest rates.

Many borrowers are now seeking to take advantage of these historically low mortgage rates, similar to prior years, where large rate drops fueled periods of heavy refinancing. Since the beginning of April, the pace of mortgage refinance applications has doubled according to the MBA Mortgage Application Survey. This should help to bolster fee income for banks involved in mortgage originations.

More important however, is that borrowers will now have additional disposable income in order to help drive consumption demand. A hypothetical borrower with $150,000 in outstanding principal who refinances their 30-year mortgage from a rate of 6.0% to 4.5% would be reducing their monthly payment by about $130. However, these cash flow savings will be limited to only those borrowers with sufficient levels of home equity. This will be a limiting factor to the magnitude of the refinancing surge.

Thursday, July 22, 2010

Existing Home Sales Fall 5.1%; Median Sales Price Up 5.2%

Existing home sales fell for the second straight month, declining 5.1% to an annualized pace of 5.37 million units. Sales rose quickly through April, likely induced by the homebuyer tax credit which required buyers to enter into contract by April 30th. Sales have since fallen off in the wake of this event. Due to the way existing home sales are recorded, at the point of closing, there is a time lag in the data and therefore it is likely that the sales number will continue to decline for at least another month. From a year prior, sales were up 9.9%.

With the decrease in sales over the month, the months supply of inventory rose to 8.9 from 8.3. The supply of inventory will have to continue to decline before prices can be certain to have bottomed out. The historical normal is around 5 months of inventory. Over the month, the median sales price rose 5.3% to $183,700, continuing a four month trend of price appreciation. From a year earlier, prices were up 1.0%.

10.07.22 (Source: National Association of Realtors)

Spending on Commercial and Nonresidential Construction to Fall More Than 20%

According to a recent report by the American Institute of Architects (AIA), spending on commercial and other nonresidential construction is likely to fall more than 20% this year -- significantly more than forecasters predicted six months ago -- with hotel and office construction down by more than 43% and 29%, respectively, according to the AIA midyear look at construction.

Even with a modest U.S. economic recovery under way, overall nonresidential spending is expected to drop 20.3% for 2010 -- and nearly 30% for private commercial development -- before edging up 3.1% in 2011, according to the AIA’s semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters. Manufacturing facilities will see a 20% spending decline. Even dollars allocated to new government and other institutional buildings, previously a pillar of strength for builders, will likely fall 12%.

Read the report.

Tuesday, July 20, 2010

Housing Starts Fall 5.0%, Single Family Starts Down 0.7%

In June, housing starts fell 5.0% to an annualized pace of 549,000 units. June’s decline follows a large drop in May of 14.9% This drop was previously reported as a 10.0% drop. This sharp decline in these two months came after the home buyer tax credit expired. June’s start rate was the slowest since October 2009.

Single family starts fell by a much smaller 0.7% over the month. However, this came on the back of a very large 18.8% decline in May. The far more volatile multi-family component plunged 21.5% in June following a 4.3% rise in May. From a year prior, total starts were down 5.8%, the first year-over-year decline since last fall.

New building permits, which tend to lead future starts, reversed two months of declines by rising 2.1% in June. However, single family permits continued to fall, dropping 3.4%.

10.07.20 (Source: Census Bureau)

Monday, July 19, 2010

CPI Falls 0.1%; Core Prices Rise 0.2%

In June, the Consumer Price Index fell for a third straight month, dropping 0.1%. The index was again dragged down by declining energy prices, which fell 2.9% over the month. The core index, which excludes prices of energy and food products, rose 0.2% following a rise of 0.1% in May. The core index has been quite stable in recent months, increasing at a mild pace.

From a year prior, the CPI was 1.1% higher. This was down from a recent high of 2.8% in December; however, it is up from negative year-over-year changes as recently as last October. The core CPI was up by a slightly lesser 1.0% from a year prior. This has remained steady for the past three months and is a cyclical low. Inflationary pressure remains very mild, and with continued productive slack there is likely to be very little upward inflation movement in near future.

10.07.16 (Source: Bureau of Labor Statistics)

University of Michigan Consumer Sentiment Index Plunges By 9.5 Points

In July, the University of Michigan Consumer Sentiment Index dropped 9.5 points to 66.5. After remaining relatively steady since last winter, the index in now down to its lowest level since August 2009. The large decline was about evenly due to the current conditions component and the future expectations component. The prior fell 10.1 points while the later fell 9.2 points. It is likely that the stock market declines of late June and early July had a significant impact on confidence. In addition, the laying off of census workers, which brought stories of a weak job market into center stage, likely reduced confidence in the job environment.

Inflationary expectations rose modestly over the month. The one-year outlook rose to 2.9% from 2.8% in June. The five-year outlook also rose to 2.9% from 2.8%.

10.07.16 (Source: University of Michigan)

Friday, July 16, 2010

FOMC Agrees on Fed Asset Sales, Unsure of Timing

The minutes of the June 22 and 23 Federal Open Market Committee (Committee) show a continuation of the discussion from previous meetings regarding asset sales and the shrinking of the Federal Reserve’s balance sheets.

The Committee members were in agreement that sales of mortgage backed securities (MBS) should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio. Any decision to sell assets should be well communicated in advance of any transactions and should be done at a gradual pace. Committee members agreed that the Federal Reserve needed to maintain flexibility and the sale of assets should be adjusted based on financial and economic developments.

However, the minutes show that there was some disagreement on the timing.

A few Committee members wanted to begin such sales fairly soon. They noted that the market was demanding safe, longer-term assets. So, a modest sale of MBS was unlikely to “put much, if any, upward pressure on long-term interest rates or be disruptive to the functioning of financial markets.”

But most participants viewed the selling of MBS as potentially tightening financial conditions and believed the modest weakening in the economic outlook warranted deferring asset sales. They preferred that asset sales were postponed until the economic recovery was well established and short-term interest rates were beginning to rise.

A few participants recommended that the Federal Reserve sell MBS and use the proceeds to buy Treasury securities of comparable maturity. This “would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions.”

Thursday, July 15, 2010

PPI: Headline Down 0.5%; Core Prices Up 0.1%

In June, the Producer Price Index for finished goods fell 0.5%. This was the continuous decline. June’s decline was primarily driven down by a 2.2% drop in food prices. Energy prices also fell, adding to the decline. In contrast, the core index, which excludes prices of the volatile food and energy product components, rose 0.1%. From a year prior, the topline index was 2.7% higher, down from a recent high of a 6.1% year-over-year increase in March. The core index was up by a much smaller 1.0% from a year earlier. This is about the same rate of growth that has occurred in recent months.

10.07.15 (Source: Bureau of Labor Statistics)

Industrial Production Up 0.1%, Manufacturing Down 0.4%

In June, industrial production rose by 0.1%. This is a significant deceleration from recent months, and the slowest rate of growth since February. Manufacturing output declined for the first time since February, falling by 0.4%. Manufacturing output was driven down by a 1.9% drop in auto manufacturing following a large jump of 5.2% in this sector in May. Non-durable goods manufacturing also fells significantly by 0.7%. Despite the drop in June, manufacturing output grew at an annual pace of 7.8% over the second quarter due to strong months of growth in May and April.

Mining output rose 0.4%, reversing a decline in May. Utilities output rose 2.7% after jumping 5.6% in May.

The capacity utilization rate remained flat at 74.1% after rising for 9 consecutive months. There still remains heavy productive slack; however, the utilization rate is considerable higher than its lows of last year. It will have to continue to increase in order to drive significant capital expenditures and payroll expansion.

10.07.15 (Source: Federal Reserve)

Wednesday, July 14, 2010

Retail Sales Fall 0.5% – Auto Sales and House Related Sectors Drive Decline

In June, retail sales fell for the second straight month, declining 0.5%. These two drops came after seven months of increases, including a very strong gain in March. Though the sales report is certainly weak, details are a bit more positive. The index was driven down largely due to a drop in auto sales, which tend to be very volatile. Core sales, which exclude gasoline and autos, rose by 0.1%. Furthermore, total sales continued to be held back by continued declines in sales at building supplies and furniture stores. Both of these sectors have been harmed by the fallback in home purchases following the end of the home buyer tax credit. Retail sales are clearly decelerating; however, they will likely continue to grow modestly. This pattern is consistent with other indicators of late that have shown a softening of economic recovery.

From a year prior, total sales were up 4.8%, compared to 8.7% growth in April. Core sales were up 3.9% from a year earlier, compared to being up 5.0% in April.

10.07.14 (Source: Census Bureau)

Tuesday, July 13, 2010

The Dodd-Frank Bill's Consequences for Community Banks: FDIC

In the previous post, I discussed the many regulatory burdens the Dodd-Frank bill imposes on community banks. The crushing weight of this bill extends beyond just regulatory compliance, and imposes many concerning changes to the structure and use of the FDIC and Deposit Insurance Fund. As the entire industry - large and small banks - shoulder the costs of the FDIC, these changes impact all banks.

Community Banks' Savings From the Broadened Assessment Base May Be Short-lived
By expanding the assessment base (from total domestic deposits to total assets less tangible capital) the cost of non-deposit funding rises. The banks that face the higher assessments will change their business plans, which will inevitably lead to a shift away from non-deposit funding sources toward deposit funding. Competition for deposits is likely to intensify, pushing deposit rates higher. Should that competition lead to a mere 5 basis point rise in deposit rates, the “static” savings for the typical community bank disappears. It also affects the availability and pricing of home loan bank advances as these are now subject to FDIC assessments. Thus, while the appeal of this change is understandable, the unintended consequences have the very real potential to lower or even eliminate the promised savings.

No Limit on Size of FDIC Insurance Fund
The Dodd-Frank Act eliminates dividends whenever the deposit insurance fund (DIF) exceeds 1.35% of insured deposits and eliminates the hard cap (of 1.50%) on the size of the fund. It also gives the FDIC unrestricted authority to set a new “designated reserve ratio” or long-term target ratio above 1.50%. The bill raises the minimum level for the DIF to 1.35%, and does benefit banks under $10 billion by requiring larger banks to make up the gap from the old minimum of 1.15% to the new minimum of 1.35%. Smaller banks would continue to pay premiums, however, how this provision will be implemented is unknown. All banks would be required to keep the fund above the minimum and at the new designated reserve ratio wherever that is set.

Additional Cost of Higher Insurance Limits
The Dodd-Frank Act does increase permanently the insurance limit to $250,000 and does extend the Transaction Account Guarantee (TAG) for two years. The permanent increase in the $250,000 coverage level, however, means that the reserve ratio of the fund (which is equal to the fund divided by insured deposits) is lower. Thus, the cost to attain even the old minimum of 1.15% is greater and the pace of the recapitalization is longer (unless the FDIC raises all premium rates to maintain the same schedule). The Congressional Budget Office “scored” this increase in premium income at $8.8 billion. How the FDIC will price the TAG program (which protects depositors in all institutions) is also unknown.

Precedent for Using the FDIC as a Government Revenue Raiser
Both the increase in the insurance coverage levels and the last minute provision to raise the minimum level of DIF to 1.35% were used as a way to increase federal government revenues and meet the “pay-go” requirements. Pay-go (or pay-as-you-go) rules require that any new spending must be offset by new sources of revenue so that there is no addition to the federal budget deficit. Premiums paid to FDIC are considered revenue to the federal government as FDIC is “on-budget.” Thus, the actions set a precedent to use premiums as a revenue raiser to support other government spending programs. It also undermines the integrity of the insurance assessment process and could ultimately undermine depositor confidence in the FDIC, as the fund will be seen as a political fund to be used for other purposes. Such an approach, in terms of its impact, is a tax on bank capital, and every dollar of bank capital serves as the basis for making loans of eight dollars or more.

I repeat my call for you to urge your Senator oppose the Dodd-Frank bill as the provisions apply crushing burdens on community banks and changes the historical treatment of the Deposit Insurance Fund.

The Dodd-Frank Bill Has Enormous Consequences for Community Banks

The pending Dodd-Frank Act will dramatically and negatively affect all banks – large and small. Some industry trade groups have said that community banks are relatively better off in the Dodd-Frank Act. So why doesn’t it feel that way? There is plenty of pain to go around and long-term unintended consequences are inevitable.

Here are some impacts, with a future post to discuss the many changes concerning the FDIC:

5,000 Pages Of New Regulations
Congress consistently underestimates the complexity and volume of the regulations resulting from new laws. Based on the number of pages of regulations resulting from previous laws, the Dodd-Frank Act will result in more than 5,000 pages of new regulation for traditional banks. This is in addition to the 50 new or expanded regulations affecting banks over the last two years.

Consumer Financial Protection Bureau Rules Apply to All Banks
All banks – large and small – will be required to comply with rules and regulations set by the CFPB, including rules that identify what the bureau considers to be “unfair, deceptive, or abusive.” The CFPB can require community banks to submit whatever information it decides it needs and the CFPB can examine community banks at its discretion on a “sampling basis.” CFPB will result in fewer and more expensive loans, as documented in this study.

Loss of Interchange Income on Debit Transactions
Small banks have an exemption from the Fed-determined interchange fee to be set for large banks, but market share will always flow to the lowest priced product, even if those lower prices are mandated. We expect that retailers in the market will seek to reduce their costs which will compress rates overall. It also means a loss of revenue that supports free transactions and other valuable services, or both.

New Capital Standards – Elimination of Trust Preferred Securities
All banks – including community banks – will be prohibited from using trust preferred securities to raise Tier 1 capital at their holding companies going forward. This will eliminate a popular source of capital that often is downstreamed to a bank. In addition, the agencies will be imposing more onerous capital rules on banks, large and small, and will force all banks to maintain higher levels of capital than expected in the past.

Significant New Disclosures and Reporting Requirements
Reporting burdens increase greatly, as the CFPB can require banks to report “the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” All banks will have to ask a business customer whether it is a women-owned, minority-owned, or small business, maintain records of the responses, and submit the information to the CFPB each year. The Dodd-Frank Act also requires 20 new HMDA reporting obligations. These and other reporting requirements will add considerable compliance costs to every bank’s bottom line.

Pre-emption Weakened and State Attorneys General Given More Power
The standard for preemption is modified for national banks and changed significantly for federal thrifts. This will create uncertainty, lead to years of litigation, and place banks at greater risk of having to comply with a patchwork of state laws. All banks will be affected. Read a detailed report on pre-emption here.

As written, the legislation will impose new costs and regulatory burdens on traditional banks that will make it more difficult for them to serve their communities and make more loans. I urge you to send a letter to your Senators to stop this bill from moving forward until a balanced and sensible approach is considered.

Friday, July 9, 2010

TARP Banks Yield Better Return for Taxpayers Than S&P 500

The taxpayers’ profits from the bank TARP programs are no surprise to the banking industry; in fact, in testimony before Congress nearly a year and a half ago (January 2009), the American Bankers Association (ABA) stated: “There is also the misperception that somehow taxpayers are going to lose money on the CPP [Capital Purchase Program of TARP]. ABA strongly believes that Treasury will make money on the CPP – billions of dollars.” [1]

Nearly 18 months later, it is now more widely recognized that TARP investments in banks are providing taxpayers with a significant return. According to a July 6 report from Keefe, Bruyette & Woods Inc., bank TARP programs yielded on average 5.5% more than the S&P 500 returned over the same period. The taxpayers earned an average 10.3% return on banks repaying their TARP investment, with returns equal to or exceeding 20% for six of the bank investments.

As of June 30, 2010, banks had repaid $138.4 billion, or roughly 75% of the Treasury’s investments. Additionally, banks paid $14.9 billion in dividends and interest, or 98% of scheduled payments. Treasury has also received $17.5 billion from warrants and the sale of Citigroup stock.

According to a Treasury spokesman, “almost all of the $24 billion in profits TARP has realized to date has emanated from the banking sector,” a fact ABA has been predicting all along.

1. Testimony of Edward Yingling on behalf of the American Bankers Association to the House Financial Services Committee. January 7, 2009.
2. “Return on Banks Receiving TARP Payments Exceed S&P Financials Index, Study Reports,” Daily Report for Executives. BNA. July 8, 2010.

Thursday, July 8, 2010

Households Continue to Reduce Borrowing in May

The Federal Reserve reported that consumer credit decreased at an annual rate of 4.5% in May 2010. The decline reflects decreased borrowings from households whose balance sheets are still suffering from the worst financial and economic strain since the Great Depression.

Revolving credit decreased at an annual rate of 10.5% in May. This is the 20th straight monthly decline. From a year ago, revolving credit was down 9.4% and down 14.9% from its peak in September 2008. Seeking greater financial stability, households have reduced revolving credit borrowings.

Nonrevolving credit decreased as well, falling an annual rate of 1.4% in May. Nonrevolving credit has fallen three consecutive months after increases in December, January, and February.

Wednesday, July 7, 2010

Consumer Loan Delinquencies Continue Broad-Based Improvement in First Quarter

First quarter results from the ABA’s Consumer Credit Delinquency Bulletin make it clear that consumer balance sheets are improving. People are borrowing less, evident in the lowest financial obligation ratio since the second quarter of 2000, saving more and building wealth. These are all positive signs.

The bulletin reveals broad-based improvement in consumer loan delinquencies for the third quarter in a row. The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, fell 21 basis points to 2.98% of all accounts from 3.19% of all accounts in the previous quarter. Delinquencies in dollar terms for the composite ratio, as shown in the chart below, fell to 3.09% from 4.01% in the fourth quarter.

Bank card delinquencies fell more than half of one percent to 3.88% of all accounts, which is below the 15-year average of 3.93%. This is the first time since the second quarter of 2002 that bank card delinquencies have fallen below 4%.

Home equity loan delinquencies fell for the first time in two years to 4.12% of all accounts from 4.32% in the previous quarter. Home equity lines of credit delinquencies fell nearly a quarter percent to 1.81% of all accounts from 2.04% in the previous quarter. Property improvement loan delinquencies fell to 1.40% of all accounts from 1.63% in the previous quarter.

Across-the-board improvements in housing-related loan delinquencies indicate stability is returning to the housing market. This is the first inkling that stability is taking hold in the housing market, but the pace of recovery will still be long and drawn out.

The overall risk in banks' consumer loan portfolios is improving and will continue to do so. Banks are putting losses behind them and following a prudent approach to new loans because the on-again, off-again economy is keeping risk high. Regulators are also demanding that banks remain cautious. With job growth creeping back slowly and personal incomes rising a bit, I'm hopeful that improvements in consumer delinquencies will continue.

The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

Click here for ABA's press release.

Tuesday, July 6, 2010

ISM Non-Manufacturing Index Down 1.6 Points to 53.8

After staying level at 55.4 points for three consecutive months, the ISM Non-Manufacturing Index fell back 1.6 points in June to 53.8. This was the first decline in the index since last November. However, a value above fifty still indicates service sector activity expansion, so the decline in the value represents a deceleration of growth over the month. The index is in line with other recent indicators for June, including the manufacturing ISM index, that are showing a softening of economic recovery.

The business output component fall back 3.0 points, but remained strong at 58.1. The weaker portion of the index was the employment component, which fell back below the expansionary threshold to 49.7. Also of note is that the new orders component fell to 54.4, its lowest level since last December. This component is indicative of future activity in coming months. If this downward trend continues it would suggest that further steam is coming out of the expansion.

Source: Institute for Supply Management

Friday, July 2, 2010

Assistance to Banks to Reap Billions in Profit: Part III, FDIC

The assistance to the financial sector has provided generous returns through not only TARP and the Federal Reserve programs, but also FDIC programs. During the crisis, the FDIC instituted the Temporary Liquidity Guarantee Program (TLGP) to guarantee banks’ debt for up to three years and fully guarantee deposits in transaction accounts. “The TLGP program has been a money maker for us," FDIC Chairman Sheila Bair said in Senate testimony, as participating banks pay fees for both guarantees provided through the program. [1]

As of December 31, 2009, the total revenues collected were $9.491 billion (not including additional surcharges that help support the FDIC’s deposit insurance fund). No new debt can be issued under the program, which closed on October 31, 2009. While the transaction account guarantee program was recently extended through an FDIC Board decision, a further extension is also included in the Conference version of the financial reform bill.

Perhaps President Obama summed up the profit realized from all the banking programs best:

“…assistance to banks, once thought to cost the taxpayers untold billions, is on track to actually reap billions in profit for the taxpaying public.” [2]

1. FDIC Chairman Bair (transcript of Q&A) before the Committee on Banking, Housing and Urban Affairs, U.S. Senate. May 6, 2009.
2. Speech at the Brookings Institute, December 8, 2009.

Payroll Employment Down 125,000 Due to Census Workers – Private Sector Payrolls Up 83,000

In June, payroll employment fell by 125,000, the first decline since December. In addition, payroll gains over the prior two month were revised downward in aggregate by about 57,000. However, just as the large payroll gain in May was driven by the hiring of temporary Census jobs, June’s decline was suppressed by the termination of 225,000 Census jobs. Private sector payrolls continued to grow over the month, but by only 83,000. Though this is an acceleration from May, where only 33,000 private sector jobs were added, it is still a weak pace and slower than the job gains in March and April. In order to begin to drive down unemployment, payrolls must grow at a pace of at least 150,000 or so per month.

Despite the decrease in payrolls, the unemployment rate, which is measured by a different survey, declined to 9.5 percent from 9.7 percent. The drop was entirely due to a decline in the labor force participation rate, which fell 0.3 percent. The rate had been recovering since last December, but has now declined for two consecutive months, suggesting that more workers are again becoming discouraged. The workforce has fallen by almost a million workers over the past two months.

10.07.02 (Source: Bureau of Labor Statistics)

Thursday, July 1, 2010

ISM Manufacturing Index Falls 3.5 Point to 56.2

In June, the Institute for Supply Management's Manufacturing Index fell back for a second straight month, declining 3.5 point to 56.2. Despite the drop, the index remains well above the expansionary threshold of 50. However, this is the lowest level since last December. Manufacturing activity in continuing to expand; however, it is becoming evident that the recovery in this sector is decelerating. If the July index number proves to be a third consecutive decline, it would cause some concern regarding the strength of the overall economic recovery.

The decline in the index was generally broad based across its component parts. The production component fell 5.2 points to 61.4, while the employment index fell 2.0 points to 57.8. As a forward looking indicator of future production, the new orders component fell heavily by 7.2 points to 58.5, the lowest level since October 2009. In addition, the export order subcategory fell by 6.0 points suggesting the fallout from Europe may be affecting foreign demand.

Construction Spending Falls 0.2%

In May, new construction spending fell 0.2% following a downwardly revised increase of 2.3% in April (previously a 2.7% rise). This volatility was primarily driven by the effect of the homebuyer tax credit which expired at the end of April. Housing activity surged in April, with residential construction jumping 5.0%. Following this jump, spending came down somewhat, falling 0.4%. However, private non-residential construction spending also fell 0.6% following a 0.8% rise in April.

Public sector construction was the only area of growth in May, rising 0.4%. However, from a year prior, it was still down 2.9%.
On a year ago basis, total construction spending was 8.0% lower. Private residential spending was up 11.2%, but private non-residential spending was down 24.8%.