Bank Failures

Grant’s Almost Daily reports that despite the seemingly calm economic winds, “Banco Popular has managed to run the ship aground. In order to shore up their sickly balance sheet, the acquiring [Banco] Santander will issue a €7 billion rights offering to shareholders. Banco Popular’s equity and junior debt are wiped out, to the tune of €3.3 billion.”

While America breathlessly waited for former FBI Director Comey to boast daytime TV ratings, the  “announcement that Banco Popular Espanol SA will be absorbed by the sounder Banco Santander under the auspices of the European Central Bank for considerations of €1 harkens back to March 2008, Bear Stearns and J.P. Morgan,” writes Philip Grant.

Have the world’s financial dominoes started falling on that side of the pond?

Here in the good old USofA. the DJIA rocks while Tesla and Amazon shares roll, but “Total US business bankruptcies in May rose 4.7% year-over-year to 3,572 filings, according to the American Bankruptcy Institute. That’s up 40% from May 2015 and up 10% from May 2014.”

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Wolf Richter points out that bankruptcies are seasonal.  Fewer of the hopelessly indebted normally throw in the towel in May. However, this year, “Total US bankruptcy filings by consumers and businesses in May rose 5.3% year-over-year to 69,668, the highest May since May 2014.”

Credit card debt is now a trillion dollars, auto debt is $1.12 trillion and student loan debt now totals $1.44 trillion.  A trillion here, a trillion there.  It starts to add up. And all of this doesn’t include the big driver of consumer bankruptcies, medical costs.

Meanwhile Green Street’s Commercial Property Index has rolled over, falling 0.4% in May to the lowest level since May 2016.  Plus, over the first four months of this year, Commercial real estate transactions dropped 17% year-over-year, to $121 billion, plunging 30% from the same period in 2015, according to Real Capital Analytics.

This matters because, “$14 trillion of real-estate debt is why real estate can trigger financial crises, and why real estate bubbles, when they implode, are so pernicious,” writes Richter.

Homes mortgages make up $10.3 trillion of the total real estate debt, with the rest being commercial real estate loans, the majority of which are held by small banks–$1.2 trillion. Regulators have warned about another bubble but banks are loading up on commercial real estate anyway–especially apartments.

Boston Fed President Eric Rosengren says,

Over the past year, holdings of commercial mortgages by the banking sector have increased 8.9%, while bank holdings of multifamily mortgages have increased 12.0%.

This growth has occurred while bank supervisors have been cautioning about the potential risks emanating from the high valuations in some sectors of the real estate market.

Here in the U.S., six banks have failed this year, one more than all of 2016.  While four of the banks were small, one was a billion dollar bank and First NBC Bank of New Orleans had $4.75 billion in assets. First NBC survived just over a decade, having started in 2006, with a who’s who of backers, including Peyton and Eli Manning, the New Orleans-born star NFL quarterbacks. The bank set a Louisiana record for capital raised by a start-up bank.

Growing a bank from zero to nearly $5 billion in ten years is beyond aggressive, not to mention First NBC had a taste for the exotic. As Richard Thompson reports for The New Orleans Advocate the bank would not only fund construction projects that generated tax credits (say low-income apartments), but would invest depositor money in those tax credits as well.

Of course, for tax credits to have value, the bank must be earning significant profits and paying large tax bills.  First NBC had no such burden.

When the bank’s loan portfolio was written down by regulators, this led to a devaluation of the bank’s deferred tax credits, whatever profits were expected evaporated and — poof — the bank’s capital was gone. With fractionalized banking an auditor’s recognition of dodgy assets leads to failure overnight.

However, the bank’s founder, Ashton Ryan, believed the press was the problem. He “blamed The Advocate’s reporting at the time for the bank’s troubles, saying the news coverage sowed more unease than the bank’s admissions themselves,” Thompson wrote.

Murray Rothbard anticipated the Ashton Ryan’s of the banking world, writing “the entire fractional-reserve system is held together by lies and smoke and mirrors; that is, by an Establishment con…. The banking system, in short, is a house of cards … Banking is not a legitimate industry, providing legitimate service, so long as it continues to be a system of fractional-reserve banking.”

A few bank failures hither and yon do not a trend make. However, needles are everywhere, waiting to pop the bubbles keeping banks afloat.

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