Sorry about the confusing sentence. I read it over, saw it was confusing, and decided to be lazy and just post anyway. Bad idea.
I meant to say that most banks have equity that is less than 10% of their liabilities. Another way to say it is that assets are less than 110% of liabilities. In reality, the %’s are lower for most of the big banks. I just wanted to point out how thin the banks’ safety margins are. Their margins are designed to withstand shallower, or more scattered, downturns than the deep and broad one we have now.
A few might be lucky enough to withstand the downturn regardless (I am being generous here), but most of the ones that survive will probably do so only by virtue of superior current and future earning power, together with no worse than average initial negative equity, and booster shots of free money from taxpayers for the interim period.
Is there enough room in our economic future for very good earnings at 90-100% of today’s banks? I doubt it. I’d guess that we are overbanked by 20-40%. I am assuming here that the illusion of sustainable high investment yields that we experienced for many years now is dead for a couple of decades. That illusion helped make a lot of investment intermediaries look more valuable than they were. We could still get back to that illusion through persistently high inflation, and that is a real possibility, but I think even then the banks are going to have to shrink.
And the assumption I make about the current assets of many banks being less in value than their current liabilities? I am exposed in my line of work to valuations of various assets and liabilities, including the major IB valuations of large and varied bond portfolios, and I have my own sense of how the financial community is valuing certain assets versus what I can see on the ground, like any other Pigg (e.g. mortgages, commercial rents and vacancies, fiscal and trade deficit pressures etc). I see people living in two different worlds, each hoping the others are dreaming.
