Credit crisis hit bank capitalization in US
Out of all the sectors that were hit by the Great Recession in 2009, the US banking sector suffered the strongest blow. The credit crisis severely impacted the capitalization and credibility of American banks. Delinquencies reached an all-time high of about 7.5% on all loans by January 2010, and 11% on single-family residential mortgages by April 2010.
Banking sector in US recovers from credit crisis damage
Nevertheless, the US banking sector has now largely recovered thanks to increased credit flow and the recovering credibility of the financial system. Banks in the US are now recapitalized and are in a better position to take measured risks, according to Loretta Mester, President and CEO of the Cleveland Fed. Mester spoke about her outlook for the US economy and its 2015 monetary policy in Ohio recently.
Loans to consumers and businesses on the rise
The chart above clearly illustrates how the value of loans made to consumers and businesses, especially mortgage loans, took a hit in the wake of the financial crisis. Lack of credit availability and consumer and business confidence led to a decline in the credit take-off.
But, with credit easing measures put in place by the Federal Reserve to revive investor and business confidence, loan disbursements recovered. Total consumer loans at all commercial banks declined from $891.3 billion in February 2009 to $811.9 billion in February 2010. They’ve now recovered to $1,198.4 billion as of January 2015.
Consumer confidence in the US economy (SPY) (IVV) is reflected in the performance of consumer discretionary ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the SPDR S&P Retail ETF (XRT). Companies including Amazon.com (AMZN), McDonald’s (MCD), and Netflix (NFLX) make up 6.3%, 4.2%, and 3% of XLY, respectively.
Meanwhile, the state of business confidence can be gauged by the performance of industrial ETFs such as the Industrial Select Sector SPDR Fund (XLI) and the SPDR Dow Jones Industrial Average ETF Trust (DIA).
Delinquencies and write-offs are on the decline
The delinquency rate is the ratio of the number of loans that have become overdue for payment or have failed to pay, to the total number of loans made. The delinquency rate is affected by the credit quality of the borrower and macroeconomic factors such as unemployment. The period during and after the housing bubble burst in the US saw unemployment shoot up. The unemployment rate hit 10% in October 2009.
Since then, the Fed’s initiatives have helped rein in the unemployment rate. It was down to 5.6% in December 2014. The consequent increase in economic well-being and decline in delinquencies is shown in the chart above.
Clearly, the impact of the headwinds is diminishing, and banks in the US are stronger and better capitalized. To add to this, a recent development could also benefit the US economy—a tailwind in the form of lower oil prices.