Banks and US sovereign debt

A review of the banking system makes it possible to understand why the federal state has become the public substitute for private credit in a deep crisis where banks have a considerable role.

It seemed interesting to give a brief summary of the performance of the US banking system at a time when growth remains driven by the budget deficit and the growth of financial debt consolidation The shadow of insolvency is starting to hover over the US sovereign debt: the deficits of the year 2010 will be close to those of the year 2009, the year 2011 promises only a little better.

In this post, we would like to document the state of bank credit in the USA (A) and to examine the losses and difficulties that it continues and will continue to face (B). We used IMF data in its Global Financial Stability Report of April 2010 to clarify the terms a situation that we will supplement with information from the Federal Reserve. With IMF data stopping at times in 2009, we will conclude with a brief summary of the most recent state bank credit in the US by referring the reader to the FED website.

The credit crisis: Banks and the financial market.

The credit crisis is being measured in the United States by the collapse of its assistance to the credit needs of the non-financial private sector. All credit (financial market and banks) decelerated in 2006 before experiencing a vertiginous drop in 2008. Its growth was negative in 2009. This negative growth implies that all depreciation was higher than new loans. granted by banks or the financial market. This negative growth has had the effect of allowing the US Treasury to finance itself very cheaply.

It is interesting to note that the prospects for credit improvement, envisaged by the IMF in 2010 (dashed line), remain strictly subordinated to the pressure that will be exerted by the formation of sovereign debt on the financing capabilities of the US financial market and the impact of the (spending) policies of the US government and the Federal Reserve. It is more specifically the effects of the public deficit policy and the management of the deteriorated balance sheet of the FED by the purchases of debt securities of agencies and MBS – old and new – GSE. As for the Federal spending policy, it is conditional on the Treasury’s financing capacity, the terms of subscriptions and the interest rates that are not foreign to the Fed’s monetary policy. In short, the scarcity of money and its price will determine the ability of the private sector to find liquidity in the US market after the federal government has used to organize a recovery still uncertain.

The contribution of bank credit to private non-financial sectors has been particularly affected by the crisis. Financing of the financial market (non-bank in blue) suffered strongly from the crisis: they fall continuously until the second quarter of 2009 (Q2) and rise very slightly in the third and fourth half of 2009, but they are never negative; therefore, credit issues have always been higher than amortization.

By contrast, at the end of 2009, banks (banks in purple) did not regain their ability to play a positive role in granting credit. In the last three quarters of 2009, banks had negative credit growth: credit write-downs outweighed credit issues.

The contribution of banks to private credit needs was, therefore, negative overall in 2009, while the financial market maintained a diminished but positive function.

The effects on growth of this very noticeable weakening of bank credit are not hard to guess: companies (especially non-corporate business SMEs and SMIs) and individuals have been shutting down the credit crunch with the impact that one can imagine on the real economy (corporate bankruptcies, mass unemployment, slowdown of consumption on credit, weakening of investments of companies and private individuals in the residential real estate, falling of real estate prices). On the other hand, large companies have been able to rely on the financial market to finance themselves by issuing stocks and bonds.

As a result, the federal government’s deficits have been more strongly replaced by defaulting banks than by a financial market that has retained a weakened positive role in the distribution of loans. In the end, the credit crisis of the financial market and banks have given public credit the role of savior of the economy.