Loan delinquencies on bank balance sheets
Wednesday, June 10, 2009 at 10:16PM Greetings fellow inmates:
Today’s will be a short post in which we will let the data speak for itself. For quite some time now we’ve heard a lot of talk about rising loan delinquencies across a variety of debt classes. Residential mortgages started going sour back in 2007, commercial real estate has been making headlines for a few months now and credit card delinquencies have recently picked up. It is important at this stage to distinguish debt that was packaged into securities and sold to investors across the world and hidden in SIVs and debt that stayed on banks’ balance sheets. These two types have substantially different pricing mechanisms; the former has a tiered structure where different investors have suffered varying degrees of mark-to-market or real losses while the latter is not subject to mark-to-market accounting. What this means is that those loans that have remained on banks’ balance sheets still do not reflect real losses nor those that are to come. For that reason, we have decided to look at delinquency rates for loans on banks’ balance sheets as a precursor of losses to come as well as an indication of health across different types of borrowers. As we found, the data does tell a striking story. The data comes courtesy of Uncle Benny and its latest point is Q1 09.
As you can see from the stunning chart below, every single debt type has seen a significant surge in delinquency rates during the GCC, and some have only recently begun to pick up. This graph pinpoints the beginning of the current GCC, as all the problems emanated from real estate loan losses. Of the total amount of loans, 5.6% are delinquent. Residential delinquencies continue to top the table at close to 8%. Total real estate delinquencies have risen from their low of 1.36% in Q1 2006 to more than 7% currently, an amazing rise. Credit card delinquencies have also risen markedly from their pre-Lehman level of 5% or so to more than 6.5%. Commercial and Industrial (C&I) loans have really spiked relative to their pre-Lehman levels from less than 2% to more than 3%. In spite of this, the remain below the recent highs of 4% reached in the wake of the dot com bust. This debt class is particularly indicative of the health of the economy as it references all borrowings by small and medium sized businesses. If they are delinquent on their loans, it means the tier of the economy is in trouble. Even leases and agricultural loans, traditionally the safest variety, have also moved higher.
To put it in perspective, the graph below charts the same thing but goes back another decade. As you can see, delinquencies are still significantly below their highs reached (at least as far back as the data goes) during the 1991 recession.
This illustrates our belief that there is much more to go in terms of higher delinquency rates across all debt classes. The reality is that the trillions of dollars in monetary and fiscal bailouts have not managed to stem losses from loan delinquencies. Some of the bailout money has allowed a limited number of borrowers to refinance, but this has only forestalled the actual defaults. Delinquency rates have shot up not only because liquidity and credit dried up, but also because many borrowers lived beyond their means, constantly depending on a rolling refinance permitted by the illusion of persistently higher asset prices. This has changed structurally and will not come back. Delinquencies and defaults will continue to increase as will the associated losses, both to banks and to the economy at large.
May your capital be safe and your investments prosperous,
MAAA
View Printer Friendly Version
Email Article to Friend
Reader Comments (2)
Any thoughts on why delinquencies were so high during the 91 recession? Is that typical or was it extreme for some reason? The dotcom bust hardly registers by comparison. Maybe just a side effect of more aggressive action by the fed in 01-02, kicking the can down the road (or more likely kicking the snowball down the hill).
fred,
Good question. I tend to agree with you that the 2001 recession was different in this regard due to the massive IR cuts and kicking the snowball down the hill. In the 90s we also had the effects of savings and loans crisis. Perhaps as banks were collapsing they refused to roll-over credit. The 90s recession was also deeper in terms of unemployment than the 2001 recession.
Another perhaps more structural factor is due to securitization. In the early 90s, most loans were still kept on bank balance sheets, whereas in 2001 SIVs were already rampant. This could have permitted banks to hide the most toxic of their assets in them, thus hiding delinquency rates on those loans.