After a week off, we’re back with the Charts of the Week. Not only was I out of the office for a good part of the 4th of July work week, but the news cycle was light as well. Rather than make mountains out of mole hills , we decided to take a break and see what developed.
The Wall Street Journal ran an article at the end of last week that visualized the declines of some of the largest banks in North America, Asia and Europe. Take a look below…
There is undoubtedly blood in streets for bankers in Europe. These are not small regional banks either; RBS, Credit Suisse, UBS, Barclays, Societe Generale, all suffering losses of over 35%! Losses are attributed to low interest rates and low borrowing demand. When banks are charging the lowest interest rates in a generation, margins shrink and profits decline, that is basic arithmetic. On top of that, consumer demand for credit has been plateauing, which also puts downward pressure on earnings.
It is important to remember that after the repeal of the Glass-Steagall act, these large banks have been able to engage in both commercial banking activities as well as investment banking activities. The repeal of Glass-Steagall has been criticized by some as opening the door for the 2008 Global Financial Crisis to occur.
Now, Republicans are trying to do something about it…
Finally, something that Democrats and Republicans can agree on! It is our opinion that Glass-Steagall was a solid, necessary piece of legislation. After being enacted in 1933, this country did not have a catastrophic banking crisis until shortly after its repeal in 1999 with the Gramm-Leach-Bliley act passing and being signed into law under President Clinton.
The purpose of this piece is not to stir the political pot, but to think about the future earnings of the large banks. Citi, B of A, etc., cannot force consumers to borrow, and they must remain competitive with the prevailing interest rates that their competitors are offering. If some form of the Glass-Steagall act is reinstated, that would put significant pressure on earnings of the banks and require a significant restructuring of how they conduct business.
We believe that given the low interest rate environment we find ourselves in, as well as renewed support for legislation, bank profits may fall further, banking sector stock prices may suffer, and the banks may be forced to levy higher fees and costs on their customers for ancillary services.
Rest assured, the banking sector is on pins and needles and will be watching the legislative branch very closely over the next 24 months.