5 charts showing deep embedded problems in the banking and financial sector – banking data shows that recession is still going with 5.64% of all loans as non-performing. Banking charge-offs at record levels.

The new motto for banks should be “look at what I do, not as I say” because bank balance sheets are still worsening.  If bad debt is any indicator of financial health or of the stability of a bank balance sheet, banks are extremely ill even after the enormous amounts of money pushed into their arena.  Bad debt through charge-offs is at modern day record levels.  If we look at data from recent recessions, we’ll see that a recession doesn’t even reach its end until charge-offs start to decline.  If that is one indicator of pulling ourselves away from the abyss, then we still have miles of swimming before we reach a safe economic shore.  Much of these problems stem from portfolios saddled with tremendous amounts of real estate debt.

Let us look at how charge-offs react with recessions:

Now here we have a fascinating look into the balance sheet of banks with assets of more than $20 billion.  We are looking at the too big to fail here.  Even with all the support their net charge-offs are spiking into record territory.  Now look at data from the last recessions.  What you will see is that charge-offs were already declining in the early 1990s.  The recession in the early 2000s is somewhat of an anomaly because as charge-offs spiked, a flood of easy loans made its way into the market quickly reversing this trend (money created by the Federal Reserve).  We were out of the recession before banks realized how much credit was flooding the market.

Loan loss reserves have gone up with non-performing loans:

Over 5.6 percent of all loans on bank balance sheets are non-performing!  This is enormous for a system that carries trillions of dollars in loans with mortgages, auto loans, student loans, and credit card debt.  Why are we to expect that the recession is over if non-performing loans are still moving higher and higher?  The banking system would like you to believe that all is well but their actions and balance sheets tell us a very different story.  We should fill our ears with wax otherwise the siren calls of the banks will lead us into disaster yet again.

If we want to get a sense as to what banks are doing with the additional bailout money, we can simply look at excess reserves:

The short drop recently comes from banks using funds to speculate through their own investment division in the stock market.  This has very little to do with bank lending to American consumers.  This policy tells us banks have little faith in the American consumer and economy although their message for the bailouts was on a different tune.

If we chart the path of credit on a chart, you can see that for the last 60 years the strongest booms and bust have come from the credit cycle.  One of the most stunning charts comes from the consumer loan securitization market:

In other words banks want very little to do with consumer debt.  And much of this also stems from the weakness emerging from the housing market yet again:

Home prices are yet again tracking lower.  So what can we expect?  We can expect that non-performing loans will continue to grow as the economy struggles while banks sit on large reserves trying to ride out the financial storm on the back of taxpayers.  This isn’t exactly what they are telling the public but this is clearly what is occurring in the data.  Similar trends in the higher education bubble and student loans are showing similar patterns.  Banks are in battle formation yet telling the public that all is well.  The above charts show otherwise.

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