US Banks Brace For Surge In Loan Losses (S&P 500 Bank / S&P 500 Index Back To Early 2009 Levels)

Here we go again?

With the economic shutdown thanks to the Wuhan virus, the Big Banks are in the US are preparing to be over, under, sideways, down.

(Financial Times) — Loan loss charges at six big American banks reached a total of $25.4bn in the first quarter. This marks a 350 per cent surge in collective provisions across Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley versus a year earlier, as charges soared to levels not seen since the financial crisis.

The change illustrates how banks are ramping up reserves to deal with anticipated loan problems among their clients, as top economists warn that the world economy has already fallen into recession. 

The provisions are additions to reserves so banks have enough in their rainy day fund to cover future losses.

Since the start of the year, US banks have been operating under a new accounting standard, dubbed “current expected credit losses”. It has changed how they calculate loan loss provisions, making it hard to compare the most recent charges with past performance. 

Screen Shot 2020-04-18 at 3.13.57 PM

Previously banks had to ensure reserves were enough to cover ‘incurred losses’, which meant they made provisions for loan losses only when customers actually missed payments.

Under the new accounting standard, banks have to make provisions based on a loan’s lifetime value. In practice, this amounts to predicting the future — a difficult task at the best of times, and nigh on impossible in the current environment, which bank executives describe as the most uncertain they have ever seen. 

It is little wonder that the S&P 500 banks index as a percentage of the S&P 500 index is back near its lowest level since early 2009.

bankssp500ratio

Despite The Fed’s massive intervention in the financial markets starting in late 2007,  but continues in force.

fedbalcrisis

The Fed couldn’t get the S&P Bank index / S&P index back to early 2007 levels with massive stimulus?

Fed Chairs Janet Yellen and Jerome Powell pose for recent Fed Chairs painting.

queenjanetprincejerry

 

 

 

Fed Tears Through 2008 Playbook to Counter Economic Hit of Virus

(Bloomberg) — The Federal Reserve has sped through a litany of tools from its playbook during the 2008 financial crisis to support the economy. While they have rolled out several forceful measures, they still have tools and may consider brand new approaches.

Here’s the list of tools the Fed has used in the past two weeks and what could come next:

Cutting Rates to Zero?
Check.
The Fed announced a rare, emergency interest rate cut on March 3 in between its regularly scheduled meetings and then on Sunday, slashed them again to near zero.

Outcome-Based Forward Guidance
Under consideration.

The Federal Open Market Committee’s statement Sunday that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The guidance could be strengthened with language that suggests they will hold rates near zero for a long time, or until the economy achieves a numerical benchmark on inflation or employment. Outcome-based forward guidance was used during the financial crisis and has been discussed by Fed officials in recent months.
The market expects the Fed to maintain rates near zero through the end of 2021.

Quantitative Easing?
Check.
The central bank said in its statement Sunday that “over the coming months” it will buy at least $500 million of U.S. Treasury securities and $200 billion in mortgage-backed securities. That language left the door open to even more purchases, and potentially for a monthly amount as they did in previous rounds of QE.

Yield Curve Control?
Still possible.
This idea was floated by some officials during their debate over strategy and tools over the past several months. The idea is to cap longer-term yields with purchases to reinforce the central bank’s intent to hold rates low for a considerable period.

“The committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance,” Fed Governor Lael Brainard explained in a Feb. 21 speech. Ten-year Treasury yields jumped to over 1%, from a record low of 0.31% the week before, as the government considers massive stimulus that will force the Treasury to issue more debt.

Negative Interest Rates?
Probably not happening.
Unlike its European counterparts, the Federal Reserve has for the past several years pushed back from negative interest rates saying the tool wouldn’t be well suited to the U.S. economy which has more market-based finance than other countries. “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Federal Reserve Chairman Jerome Powell said at his Sunday press conference.

Now, they have gone to Plan D!

AAA rated CLOs, CDOs and CMBS are among the collateral types eligible to be pledged by top banks and broker-dealers in order to access the Federal Reserve’s emergency lending program for primary dealers.

The Fed’s so-called Primary Dealer Credit Facility “will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020,” the central bank said in a Tuesday statement announcing the countermeasure to the funding squeeze caused by the coronavirus crisis

It allows for short-term lending and will be available for at least six months at an interest rate equal to the discount rate, which was lowered to 0.25% on Sunday as part of the central bank’s emergency action
Facility resurrects a program the Fed rolled out in the depths of the financial crisis in October 2008

In addition to AAA rated CLOs, other eligible securities that can be used as collateral include IG corporate debt, international agency securities, IG commercial paper, municipal securities, MBS, and equities (with the exception of ETFs, unit investment trusts, mutual funds, rights and warrants)

CLO spreads are blowing out in secondary trading and the acceptance of CLO AAA tranches by the Fed’s facility could provide some relief. The PDCF program may help the market find an acceptable pricing level amid the volatility in secondary pricing, according to market participants

CLO AAA spreads are at post-crisis wides of 180bp for short weighted average life (WAL) and 230bp for long-WAL profiles.

clodive

West Texas Intermediate crude fell another 16%.

wtislam

Meanwhile, the Dow is down another 7%.

dowflu

The Fed is going to plan D … which is BUY EVERYTHING!!!

pland

Virus Volatility! VIX, Gold, Oil, Europe, Emerging Markets (No Where To Run, No Where To Hide)

Volatility is spiking in virtually all asset classes.

volfalls

Even gold the most in over three decades.

goldslump

Wow. No where to run, no where to hide … from volatility. At least in terms of risky assets. Cash and Treasuries are the places to hide.

twister