Nervousness About Banks: Don't Dismiss It

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Includes: VFH
by: John M. Mason

Summary

Investors are selling bank stocks in the United States and around the world.

The concern is about asset quality, something that doesn't seem to have been completely addressed after the Great Recession.

If the banks still have asset quality issues, how will they handle oil debt, emerging nation debt, slowing economies, and other world problems?

Last week, I did a little piece on the banking system titled "What Is The Real Condition Of The Banking System In The United States And In The World." I just want to call your attention to a concern over banks that goes just beyond what I think. Please take a look at "Nervousness" in the New York Times and the main headlines on the front page of the US paper issue of the Financial Times titled "Investors Punish Global Banks as Fears Focus on Financial System."

It is true that commercial banks have announced record profits and managements have stated that they have taken the actions needed to stem any problems that might arise. Still there are lingering concerns about credit quality.

The economy never really "took off" after the Great Recession. Inflation actually lessened as time went on. Interest rates stayed around historic lows. Europe continued to have problems. Emerging nations overextended and then collapsed as commodity prices plummeted. And high oil prices led to over-expansion of energy companies that loaded up with piles of debt.

And the Federal Reserve and the regulators focused on bank liquidity, believing that with sufficient liquidity, the banking system could hold on and work out the remaining troubled banks in a calm, quiet manner through mergers and acquisitions. It has been relatively successful in this as the US banking system has lost more than 200 banking institutions every year since the end of the Great Recession. And this decline seems to have some time to run, indicating there are still a lot of commercial banks that are still on the edge.

For those investors who believe that the banking system in the United States as well as in the rest of the world is just fine, I would suggest going back to the starting blocks and begin your analysis once again. If I am wrong, the exercise won't hurt you and you will be able to be just that much more confident about your investments.

I have written about this problem for over seven years now. I do believe that asset quality in the banking system is not anywhere near what people think it is. The Fed stopped pumping liquidity into the banking system in October 2014. The economy seems to be weak and possibly getting weaker. There are a lot of soft spots in the world that we need to keep looking at.

And stock markets all over the world seem to be in "danger" territory as investors rush to "safe havens" and more and more interest rates drop into negative territory. Of course, negative interest rates will not help the banking system.

Be careful.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.