Filed under: Credit Card Companies, Federal Home Loan Banks, Market News
The four largest American banks, JP Morgan Chase, Wells Fargo, Bank of America and Citibank together hold $408 billion in tangible common equity and an additional $129 billion in allowances for loan losses.
Their loan portfolios include: $445 billion in home-equity loans; $136 billion in pay-option adjustable rate mortgages; $44 billion in construction loans; $628 billion in residential mortgages; $238 billion in commercial real estate loans; $255 billion in consumer credit card loans; $351 billion in other consumer loans; and $861 billion in other loans. This totals $2.958 trillion.
Tangible common equity plus reserves would only cover a lost rate of approximately 18%. Real estate and banking analysts would likely agree that this is too low given current economic conditions in the real estate and consumer sectors.
If the analysts are right and the rate is too low, only Citibank would be marginally solvent. Three of the four biggest banks have such bad loan portfolios that they would be deemed insolvent under mark-to-market accounting rules.
The current slope in the yield curve is allowing banks to earn their way into more capital. Jamie Dimon is right not to increase his dividend. This isn’t over.
J.P Morgan Chase, Bank of America, Citigroup and Wells Fargo are aligned in opposition to the Federal Accounting Standards Board (FASB) proposal. Approximately $2.8 trillion of their loans could be affected, or about 40 percent of their total assets. The impact would be even greater on smaller banks that keep more of their assets in loans that aren’t marked to market.
Pressure for the change is coming from Congress’s belief that the FASB watered down mark-to-market rules and these loose rules contributed to the financial crisis. Banks were not required to pay sufficient attention to market value in the time leading up to the crisis, estimated losses were inadequate, and banks were unprepared for the credit crunch.
On the other hand, many bankers and bank regulators believe the rules exacerbated the crisis by causing the value of some loans to fall excessively.
Under the FASB proposals, banks would show loans at historical cost and then adjust them for both loan-loss reserves and market values so investors could see the gap between what management has held for losses and what investors may believe the loans are actually worth.
The second proposal would require banks to divide holdings between those they trade and those they hold. Tradable assets would affect profit immediately. Non-trading assets would also be marked to market but would be categorized as shareholder equity called, “comprehensive income.” Mark-to-market is pro-cyclical. It should be used on liquid, available for sale assets only, and marked to their “economic” value, not “market” value.