David White

Stress Testing: What's Your Bank's AQ?

A lot is being made of the stress test results that are coming out later this week. They are important; but so is some data that has drawn little attention of late, the unemployment rate number. Unemployment is supposed to rise to the 8.9%-9.0% level. Why is this so significant for banks? The charge off rates on credit card debt generally follow the unemployment rate. If the unemployment rate reported later this week is in the 9% area, the charge off rate will likley be in the 9% area. Remember COF reported an 8.4% charge off rate for Q1, but it reported a 9.3% charge off rate for March 2009. Given this I expect COF's charge off rate to be 9% or above for April. Other banks in this industry are likley in the same boat. Plus MA reported a 10% decline in total US dollar value charged in its latest quarterly results. These two factors should be a double whammy. They should ensure that the credit card businesses of the banks involved will all be losing money for this quarter (and likely many to come). Don't forget that BAC CEO, Ken Lewis, warned recently that the credit card business is souring rapidly. When everyone gets over looking at the media darling stress test results, they may start to pay attention to the nuts and bolts of this industry like the credit card business. Those are looking increasingly ill. Keep in mind that the stress tests are likely a gimmick to make the banks seem more solid than they really are. Even the lawmakers have already said that the stress tests are too close to our current conditions to provide much reassurance about banks' stability. Looks at those nuts and bolts this week. Eventually the markets will be paying attention to them also.

Global Financial Performance

Now Bernanke is requesting more power from Congress to regulate banks, including investment banks. It looks like the markets are responding positively to this. The question now becomes, why hasn't the SEC done a better job of regulating the banks? It does seem that the Fed might be in a good position to achieve a better result if it had this further power. However, is this something we want a regulatory agency to be able to change on a whim? How hard is it for the SEC to regulate this area? Why have they not done so effectively (at least for this situation)?