While Goldman Sachs is “reaching for the Champagne”, the bigger picture in the US banking sector is still “far from pretty”, says The Economist. CIT, a lender to small and medium-sized firms, is still close to bankruptcy. Losses on loans, which typically peak well after a recession ends, are still climbing. Prime mortgages, which account for 66% of all mortgages, are the new trouble spot.
The number of seriously delinquent loans (where payments are overdue by 60 days or more) rose by 163% in the year to the end of the first quarter, while the delinquency rate on credit-card loans at commercial banks has jumped from around 5% to 6.5% in a year. Another major headache is commercial real-estate loans, which account for almost half the loans made by small and medium-sized US banks.
If they keep souring at this rate, losses could reach $30bn this year, says Lingling Wei in The Wall Street Journal. Investment group Lombard Odier reckons that the US financial sector will have to write off a further $1.1trn of bad debts.
Let’s not forget Europe, where banks have much more leverage, less capital and greater exposure to emerging markets than their US counterparts, says John Mauldin on Investorsinsight.com. Their positions are huge: if eurozone banks’ loan losses reach just 5% of their portfolio – an “optimistic” estimate – that would be a sum equivalent to 20% of eurozone GDP. The European banking crisis on the cards could be “as big a problem as sub-prime loans”. So an end to the banking crisis – and hence to the credit drought squeezing growth – looks far away.