“And with a single bound, they were free,” said Lex in the FT. This week the US Treasury gave ten large US banks, including JPMorgan Chase, Goldman Sachs and Morgan Stanley, permission to repay a total of $68bn of government capital injected during the peak of the financial panic last autumn. With confidence in the financial sector returning now that banks have passed the government stress tests and have been able to raise $100bn of capital on the open markets, the government has allowed them to make an unexpectedly early exit from its ‘Troubled Asset Relief Programme’ (Tarp).
What the commentators said
This is “an encouraging indication that some banks, at least, are growing less wobbly”, said Economist.com. Still, it’s not as though they’re completely shaking off the state. All banks are still benefiting from central banks’ liquidity injections and still need state backstops to ensure wholesale funding. The process of returning banks to private ownership has barely begun. But the banks repaying Tarp now have a major competitive advantage over the likes of Bank of America and Citigroup, which have not yet been allowed to leave the programme, said Francesco Guerrera in the FT. The latter still face “strict supervision” of lending, hiring and pay practices.
The government may be confident that the worst is over for banks, but regulators are “right to feel nervous”, said Lex in the FT. A panel overseeing Tarp has noted that the unemployment rate, now at a 26-year high of 9.4%, has already surpassed the stress-test scenario. It shows no sign of slowing, which means the rapid rise in credit-card defaults and foreclosures is unlikely to reverse soon – something we “will want to see before we become truly confident in banks’ strength”, said Blog.ockhamresearch.com.
If the markets lose confidence in the economic outlook (easy to imagine given consumers are tapped out), banks will have trouble raising more private money to offset losses and “we could be back to where the banks need substantially more government capital”, said Douglas Elliot of Brookings Institution. “We shouldn’t assume we’re out of the woods.”
What next?
In Europe, where banks were more leveraged and exposed to emerging markets than their US counterparts, the extent of the banking sector’s problems and the outlook are even murkier. The International Monetary Fund (IMF) this week urged European authorities to follow the US in conducting stress tests and developing plans to address banks’ toxic assets. The global banking crisis still isn’t resolved, which, said IMF chief Dominique Strauss-Kahn, means there can be no sustainable recovery.