I will write more on Banks later but I thought I would just highlight where banks, US specifically, sit with regards to their overall asset size. As I have written before, there are new Basel III capital requirement rules that came into play in 2013 which require systemically important banks (SIB's...any large bank around the globe, obviously including our beloved Canadian banks) to meet these capital ratios on a scale from 2013 through to 2020.
I think there is a bit of a myth out there that global banks are "more safe" today than they were pre-2008 because the banks are more regulated. They are more regulated, that much is true, but what is also true is that banks are WAY BIGGER today than they were pre-2008. And more importantly, the new regulatory regime effectively puts all of the risk on the Common Equity holder...so if there is a "triggering event" then the Common Shareholder bears all of the brunt (not taxpayers) as a cascading waterfall from more senior parts of the capital structure convert to Common Equity on a ratio basis that is very dilutive to the Common Shareholder. This is a pretty complex regulatory regime that requires work/research to comprehend but, to be sure, it has changed the risk-reward skew on global banks since 2013. It has effectively made them more volatile...and we hate volatility, for the most part.
So how big are the US Banks now? Big. 2008 was just a blip in their overall asset size growth. What's in there?...Loans, leases, Securities, Real Estate, Revolving Home Loans and even Government bonds (a good asset). With interest rates plummeting and the yield curve flattening (neither are good for banks), the banks drive for profits elsewhere. In general, they make more loans. US Bank assets have gone from around $10 trillion pre-crisis to almost $16 trillion today...+60% growth.
So where could problems for these banks lie? With Bank asset growth as it has been, we should search for what and where problems could arise.
How about Auto Loans? Now some auto loans may have been securitized (takes the risk off the bank's balance sheet as investors buy the securitized loans) but we know the securitization markets are still no where near the size they were pre-2008. How much is still on their books? I am trying to find out but for now, Motor Vehicle Loans have gone parabolic at now over $1 trillion:
And the other potential problem for US Banks may just very well be Student Loans. Again, some of these may be securitized but if not, and Hillary wins, the US Gov't will probably just forgive all of the defaults on these and bail out the students and the banks. What will Trump do should he win? Either way, there has been huge growth in this bucket of consumer debt...now at $1.3 trillion.
Just a quick look and analysis on where problems could arise. Our job is to do the research on what and how events might affect our portfolios and then invest accordingly. Full Disclosure: High Rock portfolios do not directly own any Canadian or US bank securities in any part of the capital structure.