It seems that we receive dark news from the banking industry every quarter. Just when we think they have it right, the larger banks are reporting more write-offs and larger loan loss provisions. It is a slow bleed that extends concerns by shareholders, regulators and legislators. Some have called for the banks to “just get it over” and recognize the losses.
We may be getting that in the form of stress tests for the largest 20 banks in the country. Though details are still sketchy, the essence of the tests will be to evaluate the health of these banks, assuming the economy worsens more than projected. It is a proactive measure that may force the banks to recognize losses immediately where they have been hesitant to do so in the past.
Not that the government is trying to put banks out of business. A joint statement from several federal agencies this week states the following:
“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.”
My reading between the lines tells me that the government is simply trying to identify the viable banks, support them as needed to get the economy going again, and then deal with the banks who are not viable, possibly by nationalizing them and breaking them up into smaller, more manageable (and sellable) pieces. These stress tests will speed up the process and identify who will make it and who will not.
So stay tuned. There will be enough stress to go around.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at email@example.com.)