Since a heart attack in September 2008, the patient has been recovering well. The patient is the U.S. banking system.
Most U.S. banks suffered major attacks when the financial markets froze up in the fall of 2008. But throughout 2009, banks’ profitability returned and balance sheets improved. Treasury Secretary Timothy Geithner told a congressional panel this week that banks had paid back about 75 percent of all the bailout money they received.
After heart attacks, medical doctors often require ongoing stress tests of their patients. Major U.S. banks underwent such tests in early 2009.
The results of the Supervisory Capital Assessment Program were reported on May 7, 2009. This date is now seen as a key turning point in the recovery of the U.S. economy.
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At the time, the Chicago Board Options Exchange measure of stock market volatility (VIX) was still at record levels. The index was twice its long-term average and has since declined 40 percent.
Since the announcement of the stress tests, the stock market, as measured by the Standard and Poor’s 500 Index, is more than 25 percent higher, and long-term interest rates have stabilized at historically low rates. The 10-year Treasury note yielding 3.2 percent is still well below its 20-year average yield of 5.25 percent.
The SCAP served to increase transparency in the banking system by identifying both strong and weak institutions.
Transparency is important to the proper functioning of the financial system. When credible tests on the health of the nation’s 19 largest financial institutions were reported, the financial markets breathed a collective sigh of relief and the economy began its slow recovery.
It’s time for more tests of other patients’ conditions.
A good place to start is the European banking system. European financial markets are suffering in many of the same ways U.S. banks did following the failure of the Lehman Brothers investment bank in September 2008. Since the Greek crisis, liquidity in the European markets has dried up, and banks are finding it difficult to raise capital.
A test of conditions in Idaho banks would also go far to soothe markets and encourage investment here. The SCAP report from the Treasury last year covered only a few large banks operating in Idaho.
For example, the report showed that Key Corp.’s Tier 1 Capital Ratio, the main regulatory measure of how much equity a bank has to cover loan losses, was only 5.6 percent. The Treasury recommended Key raise an additional $1.8 billion in equity capital to reduce risk. Wells Fargo’s ratio was at only 3.1 percent, and it needed to raise $13.7 billion. Both banks have successful raised the needed capital.
Some Idaho-based banks have strong capital ratios, while others are under stress. Based on the most recent data from the Federal Deposit Insurance Corp., Home Federal of Nampa, for example, has a capital ratio of 18.65 percent, while Syringa of Boise has only 6.08 percent.
Compared with the rest of the nation, Idaho banks are doing well. The 18 Idaho banks covered by the FDIC have an average capital ratio of nearly 12 percent compared with a national average of just over 8 percent. Nonetheless, regulators or banks themselves should report on what may happen if economic conditions worsen.
Increased transparency will improve the financial system and help increase investment for the economy. Additional credible tests of both global and local banks are needed to insure recovery from our financial heart attack.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.