The bank dodges a bullet and turns to a boom ahead


If you want to understand the unusual economic effects of the COVID-19 pandemic, as well as the potentially explosive growth that the U.S. economy may soon experience, one place to start is the banking industry.

14 months ago, the outlook for banks looked dire.

In the first week of April 2020, 6 million people applied for unemployment benefits, surpassing the previous record by a factor of 10. By the end of the second quarter, the gross domestic product of the United States had fallen to an annualized rate of 31.7%.

The last time something so extreme happened – in the early years of the Great Depression in the 1930s – more than 6,000 banks went bankrupt in five years as businesses and consumers stopped repaying their loans .

This time around, the banks have prepared for the worst. Collectively, the industry set aside $ 132 billion last year to absorb an expected tidal wave of defaults, according to the Federal Deposit Insurance Corp.

But then… nothing happened.

“It’s just amazing that we lived the last year with virtually no problems,” said Steve Stephens, CEO of Houston-based Amegy Bank.

Defaulted loans have increased, but hardly. They fell from 0.91% of all loans at the end of 2019 to just 1.18% at the end of 2020, according to FDIC data. This is pretty much what you would expect in a regular year.

“Now, do we say, ‘Dude, are we smart bankers? Stephens asked. “It’s an option. Another option would be to say that the government’s stimulus was so unprecedented that we can’t really give ourselves much credit.

Stephens is referring to the CARES Act, which was enacted on March 27, 2020 and provided for $ 2.2 trillion in economic relief in the form of direct payments to consumers, improved unemployment benefits and hundreds of billions of dollars in small business forgivable loans. supported by the Small Business Administration. Ultimately, the SBA funded more loans last year than it has in each combined year since its inception in 1953.

The Federal Reserve followed suit with monetary support, lowering short-term interest rates to zero percent and flooding the economy with $ 3.6 trillion in cash, nearly three times more than it injected during the 2008-09 financial crisis.

The combination of fiscal and monetary support accounted for over a quarter of US GDP.

“If we hadn’t had government support, things would have been very different,” Stephens says. “All the liquidity and artificial stimuli really helped manage the risk in the banking system.”

The question now is what to do with all that money.

Part of it has found its way into the asset markets, spurred on by falling interest rates. Since the start of last year, home prices have climbed 12%, the S&P 500 by 30% and used car prices have jumped 44%.

But much of it still lingers in consumer and business bank accounts. The value of deposits held by U.S. banks last year increased by $ 3.3 trillion to $ 17.8 trillion at the end of 2020, from $ 14.5 trillion in 2019.

This is a nice problem to have, because deposits are the raw material of the bank, but it is a problem nonetheless.

Usually, the banking sector lends 80 percent or more of its deposits in the form of loans. Today the number is closer to 60 percent. Banks pay more deposits than they use, in other words, like a shoe store sitting on excess inventory.

“Every bank faces excess liquidity and anemic loan demand,” Stephens said. “We have to put this money on the streets.”

And this is where the opportunity for explosive growth lies ahead, as credit is the fuel to engine an economy.

“What you are hearing is that we are entering a boom time,” says Stephens. “The priority for banks will therefore be to try to balance growth with very good risk management practices.”

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