Tags: Weinberg | bank | bubble | loans

American Banker’s Weinberg: Evidence of a New Banking Bubble Is Growing

Friday, 08 Mar 2013 11:07 AM

By John Morgan

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Bad habits at big banks are returning because of low lending margins and because the allure of thriving financial markets is reviving too much risk taking.

The result? There is evidence a new bubble may be forming, Neil Weinberg, editor in chief of American Banker, wrote in a column.

“Tops is the fact that with interest rates so low, there’s been a breakdown in the traditional “3-5-3” banking model — pay 3 percent on deposits, lend the money out at 5 percent and be on the golf course by 3 p.m.,” he said.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

“Compressed net interest margins mean bankers face pressure to underprice risk to win loan business and to look to other questionable tactics to turn a buck.”

Rising stock markets may ironically present a double-edged sword, he noted. “Stocks and other risk assets are back in vogue. Greed is again trumping fear,” Weinberg said.

Federal regulators have already warned banks not to boost earnings by releasing their reserves too quickly, and not to hike profits by adding high fees on customers.

Weinberg said an industry insider told him many smaller banks are trying to sell, which may present fresh temptations. “With a high price tag as their beacon, the temptation to pretty the financials is strong. That may help explain the fevered competition to write commercial and industrial loans.”

It could all end badly, even in the face of federal scrutiny, according to Weinberg.

“Think this time regulators will remove the punch bowl in time? Don’t fool yourself. Consider how blind they were to JPMorgan Chase’s multi-billion dollar London Whale until they read about him in the press.”

The Federal Reserve released its largest round of bank stress test results this week, which showed the nation’s largest banks as a group could withstand a new severe recession.

Of the 18 banks tested, only Ally Financial would be at risk of failure under the Fed’s scenario.

“The nation's largest bank holding companies have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis,” the Fed stated.

Not all observers agreed with the Fed’s conclusion.

ProPublica, an investigative journalism group, reported this week that Bank of America in particular “continues to face gargantuan payouts to clean up legal disputes from the bubble years.”

A pending lawsuit suggests Bank of America’s mortgage portfolio could cost it tens of billions more than expected, a legacy of the bank’s acquisition of Countrywide Financial in 2008, the watchdog group said.

“Bank of America, however, has kept its legal reserves low — perhaps dangerously so,” ProPublica maintained.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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