American banks are swimming in excess funds. They do not know what to do with this money so they are giving it away in the form of stock buybacks and dividends. At the same, time the irony is that the banks are just starting to report mediocre to disappointing second quarter earnings. So, on one hand, the resources necessary to support meaningful growth are being given away.
On the other hand, the need to use this money to stimulate growth has never been greater. Initial earnings reports for the second quarter suggest that the banks are not obtaining the hoped for margin increases and it is tougher to locate new loans.
The absurdity of this situation is not going to persist. The door to intra-industry acquisitions may be about to crack open. The first inkling of merger mania was seen recently when JPMorgan Chase was reported to be considering buying a payment systems company Worldpay Group in Great Britain.
Under the old political regime this would have been impossible because of regulations and a strict view of antitrust laws. However, the old regime is gone. Now regulatory agencies are, or are about to be run, by leaders who think like bankers and are therefore more willing to accede to bankers requests.
Since the financial crash in 2009, according to FDIC numbers, banks have had common equity to asset ratios of approximately 11.0 percent to 11.3 percent. The last time this ratio was this high was in 1938. Interestingly, for the last four years all of the common equity in the banking industry was invested in cash – pure cash. This has not happened since 1992, 25 years ago.
The first reason banks have so much money is because they are earning record amounts. This was true in 2013, 2015 and 2016.
The second reason that the banks have so much money is because the government has forced them to build much larger equity bases and invest the money raised into cash and securities, most of which are backed by U.S. government guarantees.