Following the loss of 635 points off the Dow in a single session and widespread investor fear over the debt crisis in the US and Europe, US policymakers need to announce support for the banking system, according to John Wadle, the head of regional banks research at Mirae Asset Securities in London.
Ben Bernanke and Tim Geithner need make an “announcement of a coordinated set of measures to rebuild confidence and economic fundamentals," Wadle said in a research note, adding that a press statement from the Federal Open Market Committee (FOMC) would be "insufficient".
Following major losses for US banks on Wall Street on Monday the Fed and Treasury need to unveil coordinated action to halt the sell-off and inspire a 20 percent rebound, according to Wadle.
“For markets to believe in their effectiveness, Bernanke and Geithner together must coordinate the implementation process using the Fed’s balance sheet and regulatory carrot/stick. We need stimulus/restructuring measures, not just more liquidity from the Fed.”
Following the losses in banks across the world—and Bank of America in particular—on Monday, Wadle said he does not believe the fundamentals for the industry are as bad as they have been in the past.
“US banks dropped 12-34 percent over the past week with Bank of America the most hurt due to wide spread fear of potential mortgage losses, the AIG/mortgage securities lawsuits and fear they may need to raise equity,” said Wadle, who noted that liquid assets and tangible equity is high.
“I do not believe the fundamentals of these banks are that bad and if we get some imaginative policy response by the Treasury /Fed these bank stocks should rebound by 20 percent.”
Wadle wants to see the Fed cut interest rates on excess reserves to zero and lower risk weightings on restructured consumer loans to free up capital for the banking system. He also hopes that banks will be forced to mark-to-market all delinquent mortgages and negative equity mortgages, but allow these to be amortized over 3 years to avoid the need for banks to raise fresh capital. Finally, he wants the Fed to use its balance sheet to only buy new government bonds for the next 2 years.
“I do not see this as harming the US credit rating if the Fed prints money to buy US bonds, provided the flow of funds hits the real economy,” said Wadle.
“What I like about the Fed being transparent about the size, duration and direction of the use of any QE3 is the voters will actually see the impact and also the funds are not touched by Congress.”