Rate Of Bank Charge Offs Surpasses That Set During Great Depression

Tyler Durden's picture

Even as the cataclysmic events of last year fade into memory and most pundits are convinced that the government alone can push the country into prosperity, if it only wasn't for that pesky unemployment number that just refuses to cooperate, yet another comparison with the Great Depression emerges, one that shows that the current period is in fact even worse than what occurred in the years after 1930. Moody's has released an analysis which shows that the most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

The estimated $45 billion in total charge-offs in the third quarter for rated U.S. banks compares to the $40 billion and $31 billion totals reported in second and first quarters of 2009, respectively.

Yet leave it to Moody's to put a favorable spin on things and to indicate that this will hardly require the rating agency to adjust their bank ratings:

These losses are consistent with our earlier estimate that rated U.S. banks will incur $415 billion of charge-offs in 2009 and 2010 ($299 billion remaining ($415 billion - $116 billion) As such, these losses have been incorporated into our U.S. bank ratings and therefore will not trigger rating actions.

However, based on our estimate, the rate of increase in the absolute dollar value of charge-offs has also slowed significantly in the third quarter of 2009.

How the charge off rate is "slowing significantly" when all factual sign point to the opposite is a bit of a mystery. Perhaps some Moody's analyst can take a walk to Stuy Town when not too busy getting advance info on upcoming LBOs to see what the economy really has in store.

In any case, a graphic representation of the Great Depression comparison is seen on the chart below:

So how does the increasing charge off rate compare to the loan loss reserves taken by US banks? The comparison is presented by the following graphic:

Here is how Moody's explains the flatlining of new charge offs, which, as expected are driven by expectations of an economic improvement:

Many U.S. banks justified a smaller loan loss reserve build in the third quarter compared to previous quarters in 2009 because of both the slower rate of increase in charge-offs and the early signs of moderating delinquency trends.

  • We estimate loan loss provisions for rated U.S. banks in the quarter at $55 billion, or approximately 120% of charge-offs or just less than five quarters coverage.
  • The excess of provisions over charge-offs represents a $10 billion allowance for loan loss build in the quarter down from $21 billion in the first quarter of 2009 and $16 billion in the second quarter of 2009.

We continue to believe it’s premature for banks to lower their reserve build since problem loans and net charge-offs continue to show an upward trend even though some, but not all, consumer delinquencies showed improvement.

So the real question is whether this optimism is justified by actual conditions? While some credit card companies have indeed demonstrated a moderation in weak credit card trends, the overall move is for ever increasing delinquencies and deterioration across the consumer landscape. As for Commercial Real Estate, with numerous vacant office Easter Eggs coming to market soon, once reserves are depleted, the real push for loss recognition may have only just begun.

Lastly, are banks now expected to be able to weather the storm on their own? If historical precedent is any indication, some of the heretofore strong banks may be in for a long-overdue marking to reality of their loan portfolios.

As expected, high credit costs weighed heavily on rated U.S. banks’ third quarter results. For most banks, third quarter earnings were at best modest and in many cases they recorded sizeable losses. As the majority of our estimated credit costs have yet to be taken, we believe earnings prospects for the fourth quarter of 2009 and for 2010 are bleak for many U.S. banks. The graph below displays number of quarterly losses that major U.S. banks have incurred since the credit crisis began in the second quarter of 2009 and through the third quarter 2009.

As charge offs and increasing loss provisions equate with actual losses and declines in capitalization ratios, it is no surprise why banks may still be leery of acknowledging the spectre that CRE is. Then again, the administration still has at least one full year of propping up the market by any means necessary and possible before the inevitable maturity rolls have to take place. And, as has been widely discussed before, absent a resurgence of the securitization market, between CMBS, and the whole loans that are carried on bank balance sheets, this will likely be the most relevant metric to follow into the next 12-18 months to see how many additional write-downs firms will ultimately be forced to recognize.

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Joe Sichs Pach's picture

"...the rate of increase in the absolute dollar value of charge-offs has also slowed significantly in the third quarter of 2009."

"absolute dollar value" meaning the value of the dollar is a lot less than it was a short time ago?  Therefore it has 'slowed significantly'...?

Slewburger's picture

I agree... 'absolute dollar value' is a misnomer.


A dollar's value is instantanous and relative only.... maybe they mean a 'normalized value'.

Cognitive Dissonance's picture

This so reminds of something we've all probably experienced, usually as kids and often with siblings.

My older brother (by 2 years) and I were housed in the same closet (it was called a bedroom by our parents but it was 8 x 9 room with bunk beds, 2 dressers and assorted stuff) and often we would wind up on either side of the bedroom door pushing it as hard as we could in an attempt to shove the other person into the bedroom wall or out of the room.

But the same thing usually happened. Since we were about the same in height and weight, it was an even match and we stalled, pushing as hard as we could but going no where, with only the door separating us.

After a minute or two of this, we would exhaust ourselves to the point where one of us wanted to give up. BUT if we didn't perfectly time the release of the pressure against the door, one of us would get slammed in the face with said door.

Every time I think about the real world pushing down and the masters of the universe pushing up, I remember those times when one or the other of us would wind up running to mom crying our eyes out, blood dripping from our nose.

Ruth's picture

maybe it's the calm before another storm, but with today's current ingenuity and promoted risk tactics attitudes in today's market I would think this will be 'financially' worse than the great depression, but on the surface as the govt. can frost over practically anything we won't realize it til wallstreetpro posts another video.  Thanks, Tyler....do you EVER get tired of hearing that?;D

mdtrader's picture

USDZAR for those paying attention!

Rainman's picture

My most reliable prophet for estimated credit losses at the banks is my sister-in-law in Arizona. Her bank sits on her defaulted $ 1.4 million Option ARM, on which she has not made a single payment in one year. Not even property taxes. She still lives in the house. No 30 day and out notice as of yesterday. Amazing.

TraderMark's picture

it's a great country


one can "own" cheaper than it is to "rent"

a landlord would have kicked a person like that out 9 months ago...

banks? not much of a hurry to take their losses.

This is one way to stimulate the economy - imagine all those people in the country not making a mortgage payments... all that can be spent at the mall or car dealerships.

Bruce Krasting's picture

Interesting. Who the hell is sitting on that one? If it is a big name bank (or finco) I would love to know.

Logans_Run's picture

Tell your sister-in-law to be mindful of the arrival of a County Marshall. My sister in SoCal, who also had not made a payment on her liar loan of $1.1 in 13 months finally received the proverbial 30-day notice visit this last week.

chumbawamba's picture

See if she can round up 50 neighbors to surround the house and keep the sheriff out.

Time to start resurrecting some old GD tactics.

I am Chumbawamba.

Rainman's picture

I won't tell her anything. Communicating with megalomaniac family members, especially in-laws, is something I desperately avoid. Thus, I do not know the bank holding the bag either, Bruce.

The County Marshall can have her.

She's been upside down more than a midget in a Tijuana strip club.

TraderMark's picture

Cool! So this means federal funds rate can stay at zero even longer so banks can out "earn" their losses

Did you see the boffo figures COF put out ? Love that spread!

Free money, boo yah!

Oxytan's picture

So reading my own post on a related (Fed-buying-equity) thread I thought "What a moron!" he (I) doesn't get it!  They cannot keep the music playing foreever! 

The light went off after reading this article.  The financial system is supposed to exist in support of the real economy.  The game ends when the real economy wakes up and sees the financial system eating it alive.

TraderMark's picture

You've got it backwards


In America, the real economy is here to support the financial economy.

New paradigm and all.

Oxytan's picture

Oh, what a relief!  This time it IS going to be different!

Anonymous's picture

On FDIC insured accounts. Several of my banks have been closed by the FDIC recently. Now my accounts are FDIC insured and that is acknowledged. But............... I have received notice from one bank that states that I must affirmatively claim the account now in the hands of the new bank. So the new bank doesnt necessarily acknowledge the account holder. This was shocking to me. The way it is written, the new bank could confiscate the cd account with any notice.

time123's picture

It will be interesting to see what will happen to earnings when new regulations take effect in the end of the year, requiring financial institutions to bring back into their balance sheet select items that are off right now. Hopefully the economy will be better, and the impact may be reduced, but nobody knows for sure at this time.

The timing signals for the XLF and KBE will help us figure out when to get in and when to get out.


P.S. I get my timing signals at http://invetrics.com

Anonymous's picture

Go pimp your shit somewhere else. This isn't a stock picking site.

Rainman's picture

The new regs will not take place in my lifetime or yours. It's the fuse on the big bomb. The ignition would be 166/7. It must be doused and it will be.

greased up deaf guy's picture

"The graph below displays number of quarterly losses that major U.S. banks have incurred since the credit crisis began in the second quarter of 2009 and through the third quarter 2009."


i assume the first "2009" should read "2008".  not sure how else this graphic can squeeze up to six quarters of data out of less than a year.


i know, i know.  details, details... 

Cursive's picture

I've heard a lot of people calling this the Great Recession.  I don't know if anybody's said this yet, but I'm going to start calling it the "Greater Depression."  Got the idea from this AH story.

Anonymous's picture

I've heard "Greater Depression" before, but I suspect "New Dark Age" is more apropos of what's coming down the pike.

isolinx's picture

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