Stop bash­ing Wall Street. Times have changed

The Pak Banker - - OPINION - Matthew A. Win­kler

THERE'S a per­verse com­pe­ti­tion among some U.S. pres­i­den­tial can­di­dates: Who can most loudly blame Wall Street for the prob­lems of Main Street. They've got it wrong. Fi­nan­cial firms are do­ing more to help con­sumers, busi­ness and in­dus­try in Amer­ica than they have in decades. And for the first time since the early years of the 21st cen­tury, global in­vestors con­sider U.S. banks among the world's best.

One of the rea­sons the Amer­i­can econ­omy is per­form­ing bet­ter than any of the largest in Asia and Europe is that its reg­u­la­tors have re­paired the dam­age of the fi­nan­cial cri­sis and the worst re­ces­sion since the Great De­pres­sion. Led by the Fed­eral Re­serve, they re­placed in­cen­tives for reck­less spec­u­la­tion with cat­a­lysts for old-fash­ioned credit cre­ation backed by lev­els of cap­i­tal that are un­prece­dented in mod­ern times. Banks to­day are most will­ing to lend money since at least 1990. Per­haps the best mea­sure of re­stored con­fi­dence in the fi­nan­cial sys­tem is the 63 per­cent of Amer­i­cans who are within 7 per­cent­age points of the all-time-high val­u­a­tion of their homes in 2006.

All but ig­nored in the pres­i­den­tial de­bates this year is the record $1.06 tril­lion of loans to com­mer­cial and in­dus­trial firms by the largest U.S. banks, an amount that has in­creased for 21 con­sec­u­tive quar­ters. That's a streak un­equaled since 1985, when Ron­ald Rea­gan oc­cu­pied the White House (and Bloomberg be­gan com­pil­ing such data).

In its quar­terly sur­vey of se­nior loan of­fi­cers, the Fed in Jan­uary re­ported that banks have been will­ing lenders for 25 con­sec­u­tive quar­ters, the long­est pe­riod of com­mit­ment since Pres­i­dent Ge­orge H.W. Bush was pres­i­dent 26 years ago, ac­cord­ing to data com­piled by Bloomberg.

That helps ex­plain why in­vestors for the first time since 2004 are pay­ing a pre­mium to pur­chase the shares of U.S. banks com­pared with their global peers on a price-to-book­value ba­sis, ac­cord­ing to Bloomberg data. The price-to-book ra­tio of the 24 ma­jor U.S. banks in the KBW Bank In­dex ex­ceeded the com­pa­ra­ble mea­sure of 157 banks world­wide for the first time since Pres­i­dent Ge­orge W. Bush was re-elected. Home mort­gages now to­tal $9.95 tril­lion af­ter bot­tom­ing in 2014 af­ter the re­ces­sion. That amount is com­pa­ra­ble to the easy­credit days of 2006, be­fore the fi­nan­cial cri­sis. To­day, in con­trast, the mort­gage mar­ket shows no signs of the lever­aged lend­ing that pre­cip­i­tated the hous­ing bust and, if any­thing, is poised to keep grow­ing.

The av­er­age home price, up 30 per­cent since 2012, re­flects an in­creas­ingly ro­bust out­look for hous­ing, ac­cord­ing to data com­piled by Bloomberg. U.S. home­owner equity now amounts to 93 per­cent of the 2006 peak, which means Amer­i­cans from coast to coast and North to South can look for­ward to re­cov­er­ing value lost from their homes when the mar­ket col­lapsed dur­ing the re­ces­sion, Bloomberg data show.

If one ex­cludes the pe­riod com­pris­ing the height of sub­prime lend­ing, the fi­nan­cial cri­sis and en­su­ing re­ces­sion, fi­nanc­ing for con- sumers to home­own­ers is as good as it's ever been and get­ting bet­ter. Credit-card lines are in­creas­ing steadily while house­hold debt pay­ments as a per­cent­age of dis­pos­able in­come have plum­meted to 10.02 per­cent from 13.22 per­cent in 2007. The com­bi­na­tion of health­ier debtors while credit is ex­pand­ing shows why banks are so will­ing to keep lend­ing.

The big­gest banks to­day bear lit­tle re­sem­blance to the risk-em­brac­ing jug­ger­nauts of a decade ago. The 24 big banks in the KBW in­dex had the low­est to­tal debt as a pro­por­tion of their as­sets since the data be­came avail­able in 2002: 15.9 per­cent com­pared to 34 per­cent in 2004 and 30.6 per­cent in 2008. Es­ti­mated tan­gi­ble com­mon equity, the most con­ser­va­tive mea­sure of a bank's cap­i­tal, climbed to a record in 2015, says Ali­son Wil­liams, an an­a­lyst at Bloomberg In­tel­li­gence.

The con­ver­gence of U.S. banks' propen­sity to keep lend­ing and global in­vestors fa­vor­ing them as best bets is re­flected in the av­er­age ra­tio of non­per­form­ing loans to to­tal loans among the KBW In­dex banks. By the end of 2015, the ra­tio was 0.66 per­cent, the low­est since 2007 and a mi­nus­cule frac­tion of the 2.96 per­cent ra­tio reached in 2009. Banks also have reined in most of the pro­pri­etary trad­ing in de­riv­a­tives that brought them into con­flict with their de­pos­i­tors. Their share of credit de­fault swaps, for ex­am­ple, is down 75 per­cent to $14.6 tril­lion since 2007.

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