At first glance what happens to banks in the USA and Europe may not appear to matter much to us here down under.
However a large percentage of NZ bank funding still comes from offshore. So a major dislocation to the financial system in other parts of the world will have a flow on effect to New Zealand. Just as it did in the 2008 financial crisis when the US Federal Reserve made a US$9 Billion swap with the RBNZ to help keep us afloat.
So it’s important to keep abreast of what is going on in the banking system overseas too…
By Justin Spittler
Banks are “reaching for yield.”
You’ve probably heard us use this phrase. We normally say it when we’re talking about investors who buy risky assets in hopes of getting a decent return.
You see, it’s become very hard to earn a decent return in bonds over the last few years.
The U.S. 10-year Treasury is a perfect example. From 1962 to 2007, 10-years paid 7.0% per year on average. Today, they yield just 1.6%.
Government bonds from England to Japan are also paying record-low interest rates. Many corporate bonds and municipal bonds yield next to nothing too.
Dispatch readers know rates didn’t get this low on their own. Central banks put them there. Since September 2008, central banks have cut rates more than 650 times. Global rates are now at their lowest level in 5,000 years.
You almost have to own risky assets to have any shot at a decent return these days. That’s why investors have loaded up on stocks, which are generally riskier than bonds. It’s why folks have piled into high-yielding “junk bonds,” which are issued by companies with poor credit.
Banks have the same problem. To make money, many have to make risky loans.
Today, we’ll show you how banks are reaching for yield. As you’ll see, this reckless practice could steer the world toward a full-blown banking crisis.
• Low interest rates have made it hard for banks to make money…
Banks make money by charging interest on loans. They’ve been doing this for centuries. But, with rates near record lows, many banks are struggling to get by.
According to Financial Times, the net interest margin for major U.S. banks is at the lowest level in decades. Net interest margin is a measure of bank profitability.
European banks are hurting too. Second-quarter profits at HSBC, Europe’s biggest lender, fell 45% from a year ago. Spanish banking giant Banco Santander’s second-quarter profits fell 50%. At Deutsche Bank, profits plunged 98%.
• Banks are making risky loans to offset low interest rates…
Financial Times reported last month:
US banks have ramped up lending to consumers through credit cards and overdrafts at the fastest pace since 2007, triggering concerns that they are taking on too much risk in a slowing economy.
According to Financial Times, U.S. banks increased credit card lending by 7.6% last quarter.
At Wells Fargo (WFC), credit card loans jumped 10% from a year ago. Citigroup’s (C) credit card business grew 12%. And SunTrust (STI), a regional bank in Atlanta, grew its credit card loans by 26%.
• Banks make huge fees from credit cards…
The average annual interest rate for U.S. credit cards is between 12% and 14%. Some charge more than 20%. For comparison, the average home mortgage in the U.S. has an annual interest rate of about 3.5%.
Right now, banks are using credit cards to lift their sagging profits. According to Financial Times, they’re making “lavish offers” to get folks to take out credit cards:
The industry has piled on about $18bn of card loans and other types of revolving credit within just three months, as consumers borrow more and banks battle for customers with air miles, cashback deals and other offers.
Even worse, banks are recklessly lending to people with shaky finances and low credit scores. CNBC reported last week:
Ten million new consumers entered the credit-card marketplace in the last year alone…
Just over half of the originations came from millennials in their 20s opening their first card. Including those accounts, 60 percent of new customers were subprime borrowers, meaning those with a credit score of 660 or below.
• If this sounds familiar, it’s because lenders did the same thing during the last housing boom…
During the early 2000s, the U.S. housing market was on fire. Many lenders thought home prices would “never fall.” So they issued millions of mortgages to people with bad credit.
When housing prices crashed, subprime borrowers defaulted on their loans. The collapse of the housing market triggered the 2008 financial crisis.
Banks are now making the same mistake with credit cards. This hasn’t been a problem so far. According to The Wall Street Journal, delinquency rates for credit cards are at the lowest level since 2003. But that could soon change…
• U.S. banks are bracing for huge losses…
Financial Times reported last month:
Synchrony Financial, the largest supplier of store-branded cards in the US, sent a shudder through the sector in June when it increased its forecast for credit losses.
Capital One added $375m to its loan loss reserve for its domestic card business, according to Barclays, while JPMorgan Chase added a $250m loss allowance for its credit-card portfolio.
In other words, major U.S. banks have set “rainy day” funds in case credit card defaults surge. But most banks have no idea what’s about to hit them…
• Casey Research founder Doug Casey thinks a major financial crisis is about to hit us…
Eight years ago, a “giant financial hurricane” slammed into the global economy.
It put millions of Americans out of work. It caused the S&P 500 to plunge 57%. And it triggered the worst economic downturn since the Great Depression.
According to Doug, this storm never left us. It’s been hovering overhead, gaining strength.
We’re now exiting the eye of the storm. When the tail end makes landfall, it’s going to trigger something “much more severe, different, and longer lasting than what we saw in 2008 and 2009.”
For the past eight years, central banks have been desperately trying to fix the economy. They’ve cut interest rates hundreds of times. And they’ve “printed” more than $12 trillion.
The government said these radical policies would fix the economy. But they’ve only made it weaker. The evidence is overwhelming:
– The U.S., Europe, and Japan are all growing at the slowest pace in decades.
– U.S. government debt has jumped 130% over the past decade. It’s now at an all-time high.
– U.S. companies are borrowing faster than they did during the dot-com bubble or housing boom.
– Corporate leverage, which measures net debt against earnings, is twice as high as it was in 2007.
• This will not end well…
Doug warned earlier this year:
These reckless policies have produced not just billions, but trillions in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will in many ways dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.
We encourage you to take shelter in gold. As we often say, gold is real money. It’s preserved wealth for centuries because it’s a unique asset. It’s durable, easily divisible, and easy to transport.
Most importantly, governments can’t destroy gold’s value with reckless policies. Their destructive actions only lead people to buy more gold.
This year, gold is up 27%. But we think it’s headed much higher. To learn why, watch this short video.
Chart of the Day
European banks are in big trouble.
Earlier, we said profits at Deutsche Bank, Germany’s biggest bank, plummeted 98% last quarter. It was the fourth straight quarter the company’s profits nosedived.
Regular readers know what’s killing Deutsche Bank…negative interest rates.
Negative rates are the latest radical government policy. They basically flip your bank account on its head. Instead of earning interest, you pay the bank to look after your money.
The European Central Bank (ECB) introduced them in June 2014 to “stimulate” Europe’s economy. Politicians think they will get folks to save less and spend more.
It hasn’t worked. According to The Wall Street Journal, the savings rate in Germany is at its highest level since 2010. Folks in Denmark, Switzerland, and Sweden are saving money at the highest levels in two decades.
About the only thing negative rates have done is hurt Europe’s banks. As you can see below, Deutsche Bank’s stock has plunged 64% since the ECB introduced this idiotic policy two years ago.
In June, Deutsche Bank’s CEO said its business will suffer as long as negative rates are in place. He’s not the only one who thinks this. According to Bank of America (BAC), negative rates could cost European banks as much as €20 billion a year by 2018.
Last week, credit agency Standard & Poor’s said negative rates could pressure European banks to make risky loans. Financial Times reported:
This pressure could push banks to increase higher-risk activities to boost income. “Negative interest rates may or can lead to other steps as banks try to cope with reduced margins,” the report said.
“We remain concerned about a potential mispricing of risk that might go along with a new aggressiveness to chase higher yields,” it added.
In other words, European banks could soon make the same mistakes U.S. banks are making right now. This is one of many reasons to avoid European bank stocks right now.