A somewhat alarming statistic from Martin Wolf in the FT.
According to the Federal Reserve, US commercial banks are holding equity of $2.14 trillion. This is to back loans (the banks would call them assets) of $22.8 trillion.
To put it another way, for every £1 banks have on hand, they have lent £10.
This is entirely safe, until it suddenly is not. Banks exist to give out more money than they have, that’s the point of them. The question is, how much is ok?
A 10-to-1 leverage ratio looks fine when everything is going swimmingly. But we’ve been waving-not-drowning for ages and the seas are hardly getting any calmer.
How many more lenders will go the way of Silicon Valley Bank? If we’re lucky, none. Do you feel lucky?
It seems fair to assume that the major banks, the ones that are “systemically” important, are perfectly sound. (What about Credit Suisse? Don’t ask.)
The risk is that some of the smaller banks go under and form enough of a problem to be systemic in all but name.
Then there needs to be bailouts that are either directly arranged by the state, or organised by the big names, with the clear if unstated promise that their risk is underwritten by the government.
As noted here before, this isn’t 2008 again. But it is quite something that we have got anywhere close to it in such a short amount of time.
The City saying goes that major crises start when the final person who can remember the last one retires. Anyone over the age of 30 can remember the financial crash. This is more than just not learning old lessons. It is flat out ignoring them.
