Commercial Bank Lending Is The Next Market Catalyst

|
Includes: BTO, FAS, FAZ, FAZZ, FINU, FINZ, FNCF, FNCL, FXO, IYF, IYG, JHMF, RWW, RYF, SEF, UYG, VFH, XLF, XLFS
by: Randy Lacen

Summary

The commercial banking sector recovers from credit crunch.

Low to moderate central bank interest rates provide liquidity to commercial banking sector and eliminates unnecessary lending/default risk.

Credit tightening is at all time peaks in US commercial banking sector.

Full Employment Data.

Finally in 2016, market speculators can once again come around the financial banking space in solace and sparingly say to one another "a disaster like Lehman Brothers is a long way off".

And they are right. The financial crisis of 2008, in theory, was the result of a mass liquidity trap stemming from years of undue commercial and investment banking lending practices and abuse. The merging of commercial and investment banking practices on Wall Street created an unprecedented amount of global financial stress with lingering uncertainty across the global financial system. Needless to say, the financial crisis of 2008 was consolidated around a broader need for bank recapitalization to relieve a mass liquidity trap build up within the private banking space by purchasing troubled mortgage bank debt. The government program operating in the United States was known as TARP.

Of course getting fresh capital into the banking sector was not the final answer to the credit crunch. Central banking systems across the world made drastic key interest rate cuts as well in a desperate attempt to shore up global subprime lending practice and declining global equity markets. The direct effect for lower interest rates undoubtedly set the tone for what we know today as "easy monetary policy". However, the controversial and historic central bank policy for lower key interest rates for a longer period of time here in the United States does not completely cede power from lasting economic principals for a sustainable credit market in the future. In theory, low to moderate central bank interest rates should provide adequate liquidity to any domestic banking sector in relation and eliminate unnecessary lending or reinvestment risks. The issue then does not become when interest rates rise in the economy. The issue becomes where do banks really start scaling commercial bank lending when interest rates are so low? Again the threat of deflation is real, as the 10-year German Bund continues ever lower right behind the Japanese JGB. But even a carefully injected 100 basis point central bank rate hike, for example, out of the US or any other global central bank competitor to curb any future deflationary velocity within global debt markets is a linear concept. This cannot dynamically encourage commercial bank lending at the same time and reflate global debt markets to the extent before the financial crisis of 2008. Contradictory to what fear in the spot marketplace wants fundamental economists to believe. You can't raise interest rates and expect people to finance at higher lending pegs.

Full employment data in the United States also strengthens conviction that there may be new demand for commercial bank credit post-Lehman Brothers stateside. Tighter credit standards prevented 5.2 million mortgages between 2009 an 2014. The Urban Institute recently addressed the issue that mortgage credit today is tighter than at the peak of the housing bubble in 2005, yet is significantly tighter than it was in 2001. Prior to the housing market meltdown. The Urban Institute's Housing Credit Availability Index (HCAI) continues to show the market taking less than half the credit risk it was taking, pre-crisis. It is also possible to have macroeconomic equilibrium at less than or equal full employment. If current levels of aggregate demand are not adequate to purchase all goods produced in an economy, then output cuts back to match the level of aggregate demand. The effect of monetary expansion on the aggregate demand curve, showcases a decrease in interest rates causes the public to hold higher real balances. Monetary expansion stimulates aggregate demand and thereby increases the equilibrium level of income and spending.

And now with US subprime mortgage origination finally on the rise in the first half of 2016, aggregate demand combined with lower interest rates, full employment data, and gradual subprime lending should create a greater case for the Fed to accommodate lower to moderate interest rates for longer without neglecting the threat of deflation. The Federal Reserve Bank can raise interest rates, but don't think for one second 100 basis points, for example, can effectively save a financial market from making bad loans.

So commercial bank lending is definitely our next market catalyst, higher.

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.