[PEN-L:4838] Re: credit & capital

[dhenwood@xxxxxxxxx (Doug Henwood)]

At 3:03 PM 4/25/95, Jim Devine wrote:


>IMHO, to a large extent,
>the financial fragility has been shifted from the banks and
>corporations to the 80%.  The corps got out of their debt trap
>partly because stagnant wages and salaries, plus down-sizing
>that shifted the costs and has boosted profit rates of late.
>On the other hand, the banks benefitted from the very
>steep yield curve of circa 1992 that meant a big gap between
>the rate we earn on deposits and what we pay on loans.
>
>Doug or whoever has more up-to-date info, is this perception
>accurate?

Household balance sheets are in better shape than they were at the end of
the 1980s now, too. The steep decline in rates from 1989-92/3 plus the
attack of prudence during those years helped reduce both debt stock/income
and interest/income ratios dramatically for households as well as financial
and nonfinanical businesses. The steep yield curve - Greenspan's greatest
achievement - made for buoyant financial markets, which allowed firms to
float lots of stocks & bonds, which paid off old high-coupon debt, and
allowed the banks to recapitalize themselves by stiffing depositors and
buying medium-term government paper paying 3-5 points above fed funds.

In most cases, these healthier trends have been reversed over the last year
or so; household debt is rising again, banks are making plenty of loans
that will turn bad tomorrow, and short-term rates have doubled since their
trough.

PS: The improvement in the banking system has been amazing. I've just
gotten the FDIC's FDIC Quarterly Banking Profile, 1994Q4, and it reports
that banks had a return on assets of 1.15% for all of 1994, a very healthy
figure - up from 0.49% in 1989. Noncurrent assets were 3.02% of the total
in 1991; that's down to 1.01%. Equity was 6.21% of total capital in 1989 -
it's now up to 7.78%. The industry has shrunk dramatically, though; we're
down from 12,709 banks in 1989 to 10,450 at the end of 1994.

Doug

--

Doug Henwood
[dhenwood@xxxxxxxxx]
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