Reader "Henry" has a question on the loan loss provision chart I posted in Former Fed Vice Chairman vs. Mish: Is the Fed Out of Ammo?



Henry writes ...



Hello Mish,



Thanks for writing and sharing your wonderful column. It has been very informative and educational.



Could you please help us mere mortals decipher the ALLL/LLRNPT chart in a follow up post?



I have difficulty reconciling the units, and I suspect I'm not the only one. Exactly what does that chart depict?



Thanks.



Henry

Assets at Banks whose ALLL Exceeds their Nonperforming Loans







The ALLL is a bank’s best estimate of the amount it will not be able to collect on its loans and leases based on current information and events. To fund the ALLL, the bank takes a periodic charge against earnings. Such a charge is called a provision for loan and lease losses.



One look at the above chart in light of an economy headed back into recession and a housing market already back in the toilet should be enough to convince anyone that banks already have insufficient loan loss provisions.



That is one of the reasons banks are reluctant to lend. Lack of creditworthy customers is a second. Quite frankly would be idiotic to force more lending in such an environment.

ratio of loan loss provisions to nonperforming loans across the entire banking system

Magnitude of the Problem

Nonperforming Total Loan Percentage

Total Loans and Leases

admitted

Charts Understate the Problem

Banks Oppose Rule Changes

Wells Fargo & Co., the largest home lender in the U.S., said it disagrees with an accounting board’s plan that would require banks to report the fair value of loans on their books.



“We strongly oppose the expansion of fair value as the primary balance-sheet measurement attribute for virtually all financial instruments,” Wells Fargo Controller Richard Levy wrote in the Aug. 19 letter. “It will only serve to cement a short-term focus on fair-value measures.”



Wells Fargo, based in San Francisco, said the proposal would lead investors to put more emphasis on short-term results, eroding support for the banking system. The lender also said the new rule would mean deriving values for illiquid instruments like loans from subjective “Level 3” valuations such as models.

All Major Banks Oppose Honest Reporting

Banks Recruit Investors To Kill Fair Value Proposals

Banking lobbyists have launched an e- mail and Web campaign to mobilize investors against a proposed expansion of fair-value accounting rules that may force banks such as Citigroup Inc. and Wells Fargo & Co. to write down billions of dollars of assets.



The American Bankers Association opposes the Financial Accounting Standards Board’s plan to apply fair-value rules to all financial instruments, including loans, rather than just to securities. The group says the rule could make strong banks appear undercapitalized.



Fair-value, also known as mark-to-market accounting, forces companies to adjust the value of most securities they hold to market prices each quarter. It became one of the biggest flash points of the financial crisis when banks barraged lawmakers and the Securities and Exchange Commission with complaints that the rule exacerbated their problems because they had to record losses on mortgage bonds they had no intention of selling.



FASB in April 2009 relaxed that requirement after being pressured by lawmakers on a House Financial Services subcommittee. At the time, FASB Chairman Robert Herz said Congress stepped in because of complaints from banks and their trade groups.



The change raises the stakes for the 26 biggest U.S. banks, which currently value loans at $94.8 billion more than market prices, Barclays Capital analyst Jason Goldberg said.



San Francisco-based Wells Fargo said the fair value of its loans was $721.1 billion, or 3 percent less than the carrying value. Regions Financial Corp., based in Birmingham, Alabama, estimated loans were worth $70.2 billion, 15 percent less than the value reported on its balance sheet.

Undercapitalized Banks

purposely

Small Business Trends

Structurally High Unemployment For A Decade

Consumer demand is dead. That demand is not coming back anytime soon, and there is no driver for jobs if it doesn't.



Harsh Reality From Bernanke



In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:



"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."



Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?



If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion. Ask yourself: Is that what the stock market is priced for?

Addendum

Off Balance Sheet Accounting at Citigroup and Wells Fargo

FDIC Allows Banks To Hide Insufficient Capital

The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.



Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books.



Executives from Citigroup, JPMorgan, Bank of America, Wells Fargo & Co., Capital One Financial Corp. and the American Securitization Forum met FDIC officials Dec. 2 to discuss capital requirements related to the FASB measure.



The executives proposed that “the transition period should extend beyond 2010 to a point in the economy where unemployment is lower and issuers are less capital-restrained from growing their balance sheet and providing credit,” according to a paper the ASF presented the FDIC.



Citigroup suggested three years to offset assets and liabilities brought onto balance sheets, Chief Financial Officer John Gerspach said in an Oct. 15 letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.