When reading the financial press these last week you may be impressed by the sudden surge in positive news about the world’s biggest banks. You are seeing glowing reports on how many of these banks are now showing huge improvements in earnings suggesting that they are really recovering from the gloom and doom of past years.
But hang on a minute, these banks are massive and are said to be holding huge volumes of deposits as well as lending huge amounts to the real economy. They have been lending for years to large and small companies for working capital and investments and to ordinary people for housing and consumer loans.
The amounts that they have been lending are truly huge and are as big and bigger than the GDP of most their home countries.
The results from the banks depend on several rather simple numbers:
- The financial difference between the interest rates of the above loans above cost of funding these loans;
- Plus income from wealth management, trading and investment activities;
- Less the costs of running the banks – basically IT costs, salaries, bonuses, rent, etc…
- Less any losses from bad loans, bad investments, or fines from the regulators.
The amounts of the balance sheets of the biggest banks are so large and that do not change that much from one year to the next. Furthermore, the margins that they take from depositors and borrowers are all subject to the same competitive pressures from global money markets that price everything to all banks fairly efficiently. So you would not expect the results of the banks to be very different from one year to the next.
Recent developments in accounting during the last decades have been forcing banks to set aside reserves for possible loan and other losses and they are included in the income statement as losses that year. If the losses do not actually occur then the reserves are entered back as income.
Covid-19 was expected to cause huge losses for banks as their borrowing customers faced difficulties in repaying the loans. This did not happen although huge reserves were set aside for possible losses. Now, this year we are seeing these reserves popping back as “income” and banks look good again. The fact is that taxpayers have been bailing out these borrowers with huge amounts of cash that governments have been borrowing. It is extraordinary that the banks have been effectively bailed out once more by taxpayers who are now on the hook for future debt repayments by our governments.
With the Delta variant has even taken the scientific and medical community by surprise – we were not expecting to see a sharp increase in infection rates this summer in Europe. I wonder what will happen with the bank’s results now that less money will be available for future bailouts from governments.
Your correspondent, for one, objects to high dividend payouts by banks to their shareholders when the source of that cash is a bailout from taxpayers.
With the ECB is pumping new money into the banking system every week at below market rates, one must ask why banking is outside the real economy and able to profit at our expense without consequences.
Thus the financial press is basically treating taxpayers as fools when the headlines rave about how well these big banks are doing.
One can honestly say that the banks have taken taxpayers to the cleaners – the expression “bank robbery” has ´taken on a whole new meaning!