One lazy but fun thing to do as a financial blogger is to find two publications saying the opposite thing on the same day, and then be all “haha, dopes.” Business Loans Flood the Market, the Journal informed us this morning, while Bloomberg tells us that by another measure loans are at a five-year low, though being Bloomberg the way they put it is JPMorgan Leads U.S. Banks Lending Least of Deposits in 5 Years. So is there a flood of loans, or a least of loans? Which is it, guys?
Well, both, obviously; “haha, dopes” would not be fair here. Loans are up, relative to the last couple of years, but loans as a percentage of deposits are at a low – 84% for the top 8 commercial banks, per Bloomberg, as opposed to 101% in 2007. Bloomberg acknowledges this tension:
Falling ratios don’t mean banks have shut the lending spigots. Measured in dollars, total loans rose in the fourth quarter for the biggest eight lenders to $3.9 trillion.
As does the Journal, which notes that “The push comes at a time when many banks have been flooded with deposits as slow economic growth and low interest rates crimp investment.”
The way I think about banks is that they do two somewhat separate things, which are:
- satisfy some people’s demand for money claims (short-term, safe, exchangeable-for-fixed-amount-of-cash bank liabilities),1 and
- satisfy other people’s demand for loans.
It’s not entirely obvious why those things would move in lockstep: Read more »
When the London Whale thing came out, JPMorgan made one sort of clever attempt to minimize it by saying this:
Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS [available-for-sale] securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
What did this mean? Well, I think it roughly meant what it said, which is that as if March 31, JPMorgan’s Chief Investment Office had about $375bn worth of bonds for which it had paid about $367bn, and that after March 31 (1) that portfolio of bonds increased in value to at least $375,000,000,001 and (2) JPMorgan had sold at least some of those bonds at a profit. But one nice thing about it is that, if you squinted, you could read it as “our hedge decreased in value, yes (and by $2bn), but that’s because the underlying portfolio increased in value (by $8bn), so net-net we’re way ahead, and it was a hedge, and whaddarya gonna do, hedges go down when things-hedged go up, that’s life.” That turned out to be an entirely wrong reading but hey they tried!
Reuters moved that story forward a bit with this kind of interesting parsing of Jamie Dimon’s words, including particularly the statement that JPMorgan had realized $1bn of gains on the CIO portfolio of available-for-sale securities between the end of the first quarter and the beginning of that super-awkward whale-confession conference call. Read more »
Like I mentioned earlier, the David Viniar show this morning is a good time in its (relatively) quiet way. If, like me, you’ve drunk the GS we-understand-risk Kool-Aid, you’ll particularly enjoy Viniar’s take on capital requirements, which is – and I say this as a compliment – pretty cynical. Now, one thing that you might have in your arsenal of thoughts about bank capital is something along the lines of “capital requirements are a way of forcing bank managers to confront the risks of their positions and fund those positions in a loss-absorbing way to protect their creditors and the financial system more broadly.” Your faith in that position should I think be a little shaken by some of the Viniar Q&A. For instance:
Roger A. Freeman – Barclays Capital: [H]ow are you charging the desks for capital at this point? Is it on a Basel I basis or Basel III or some combination?
David A. Viniar: … As far as how we’re charging the desks, that’s a little bit of a complicated question. And we’re working through that now, and it — there’s no one-size-fits-all yet. And we have to be careful. As you know, Basel III does not kick in for quite a while, and quite a bit of what we do is very short dated. And so we don’t want to charge desks on a Basel III basis, have them turn down profitable opportunities that would be long gone from our balance sheet long before Basel III ever kicks in. So we’re really taking into consideration the tenor of what we do and trying to figure out what capital regime we’re going to be under. And it’s still — I would say, we’re going through a transition process here.
On the one hand, totally unsurprising and unobjectionable. On the other hand note the pragmatism: if and when our regulators are going to charge us for capital under the (generally higher) Basel III rules, we will charge desks for capital based on those rules. If not, not. The rules are the rules and the transition to new rules will be made in accordance with the rules. Only. If you thought “well, Basel III will improve the health and safety of banks by steering them away from the riskiest worst scariest products” – guess what, Goldman disagrees. They’ll manage capital to whatever regime is in place, as a matter of complying with regulation, but the capital rules appear to have no effect whatsoever on how they actually think about the risks of their assets, trades and businesses.
Are they wrong? Read more »