Friday, October 12, 2012

This Week in Bank Failures

Is the U.S. housing market “turning around”? That is a subject being examined this week as both JPMorgan and Wells Fargo reported healthy-looking earnings based on the premise of increases in home values and home building. My own opinion is that home building will have to decline from current levels in most areas and that real estate values are not likely to increase or decrease by much over the next 14 years. Analysts and traders who adopt this view say that JPMorgan’s latest earnings number probably can’t be repeated, and the stock fell off 1.5 percent after the report. I worry about how sensitive some banks’ earnings are to the state of the real estate market. If rumors of a turnaround in real estate make this much of a different in earnings, what will rumors of a decline do?

Bank of England deputy governor Paul Tucker commented about the political risks of another bank bailout. It is such a sore subject with the public, he said, that legal changes were needed to make it impossible for future bank bailouts to be government-financed. “If there was to be another financial crisis, once we have got through this one,” he said, “and there was a need to bail out the banks, I think the backlash would be uncontainable.”

In the United States, giant banks with $50 billion in assets or more are conducting ongoing stress tests already. For other large banks with at least $10 billion in assets, the stress tests will have to start in 2013, regulators have decided.