Bank Debt Is Near Record Low


Those crazy days when banks had debt ratios of 30, 40 or 50 times their assets are over, with leverage actually near a record low, according to the latest Federal Reserve statistics.

For financial institutions not named MF Global, the leverage ratio in October was 7 to 1, just off June’s all-time low of 6 to 1.

That’s down from an all-time high of 36 to 1, which came in December 2007 just before banks such as Bear Stearns, Lehman Brothers and a bevy of other Wall Street titans came crashing down and nearly destroyed the U.S. economy. (MF Global was running about 33 to 1 before capsizing under the weight of bad bets on European sovereign debt.)

The trend is treated as good news by economists who have been scrambling to project just how much exposure the American financial system has to the spreading sovereign debt crisis in Europe.

“While this does not make the US banking system immune to a ‘Lehman-like’ European event, it does suggest US banks are in solid financial shape,” Joseph LaVorgna, chief U.S. economist Deutsche Bank, told clients. “This should allow them to weather various negative exogenous shocks reasonably well.”

While keeping leverage low, banks also are itching to lend, according to LaVorgna.

The most recent Fed Senior Loan Officer Survey shows willingness to lend at 18.8 percent in October, below the annual average of 23.7 percent. But the 2011 number is actually the best since 1994.

“This should not come as a surprise to market participants given the extraordinary health of US commercial bank balance sheets,” LaVorgna said. “The industry has gone through a period of unprecedented deleveraging over the past several years.”

Yet bank stocks continue to sink.

As analyst Dick Bove has been telling anyoneand everyone, U.S. investors are too risk-averse when it comes to banks, selling them on fears of European debt contagion when they should be buying on the notion that the sovereign crisis actually will benefit American institutions.

Investors, though, have been down this road before—being told that all is well and there is no risk to a looming crisis, only to be ambushed by off-balance-sheet debts and other non-transparent liabilities that have come back to bite them.

LaVorgna, though, insists that the low leverage ratios shows the banks are well positioned for this particular crisis.

“The bottom line is US bank balance sheets are in excellent financial shape,” he said.


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