Reinvention: that is what the US of A is good at. And data published by Federal Deposit Insurance Corporation last night may give the strongest indication yet that the US has reinvented itself, and is now on the road to recovery.
Earnings at US banks during Q1 were $40.3 billion, and never before have US banks made so much money in a single quarter.
The capital tier one capital ratio at banks – that is to say the ratio of a bank's core equity capital to its total risk-weighted assets – has now been 13.1 for the last 12 months. The Basel III accord requires a capital tier one ratio of 6 per cent.
Furthermore, on the liabilities side of balance sheets, banks decreased their reliance on short-term with the deposit-to-liabilities ratio hitting a 20-year high of 84.6 per cent.
The reason is not rocket science. Loan delinquencies and defaults have been falling.
The US is not only the master of reinvention; it is good at creative destruction too. Bankruptcy laws are softer, for example. The US rules regarding negative equity are different too. In the UK, if your home is repossessed, and your mortgage is greater than the value of the home, then you are liable for the difference. In the US, it is the other way round – the bank is liable. This led to a somewhat cruel repossession policy by US banks, but at least this meant that the debts incurred as a result of falling house prices sat on bank balance sheets rather than household balance sheets. The effect of this was a very painful short term hit, but in the long term, perhaps a faster recovery.
The US also differed from Europe in that it was much slower to impose austerity.
The twin pillars of creative destruction and less austerity may explain why the US is growing, while Europe remains stuck in depression.
© Investment & Business News 2013