Banks Have 99 Problems But Liquidity Ain't One
NEW YORK ( TheStreet) -- Big banks face a myriad of issues in the coming year, but liquidity isn't one of them.
The largest U.S. banks have come a long way over the past five years, strengthening their capital foundations and also improving their liquidity, both of which bode well for earnings growth.
Guggenheim Securities analyst Marty Mosby on Friday said in a report that in 2007, each of the large-cap banks covered by his firm "except PNC (PNC) and the trust banks, had a deficit Liquidity Coverage position," but that the big banks have now "improved their respective liquidity positions to the point of having an excess of almost a trillion dollars."
The large banks' increase in liquidity "is the most important element of their recovery over the last five years," Mosby said, adding that the "excess liquidity can begin to be deployed into incremental loan growth or into longer-term securities once long-term interest rates begin to improve. As a result, we estimate that the earnings per share accretion from the deployment of this excess liquidity could improve current earnings power by about 6% for the median Large Cap Bank."
Mosby said that among the large bank holding companies covered by Guggenheim, the ones with "over 10% potential accretion" to earnings from the deployment of excess liquidity include Bank of America (BAC) , Citigroup (C) , JPMorgan Chase (JPM) , Wells Fargo (WFC) , Bank of New York Mellon (BK) , Northern Trust (NTRS) , State Street (STT) and Zions Bancorporation (ZION) .
Government Shores Up Liquidity
Most of the coverage of the changing regulatory landscape for banks has focused on capital strength, since the bursting of the real estate bubble made it clear that many banks didn't have sufficient reserves and core capital to cover loan losses. The perceived weakness in capital strength fed fears of a liquidity crisis, and large thrifts that failed early in the credit crisis, including IndyMac Bank and Washington Mutual, experienced alarming deposit flight before being shut down by the Office of Thrift Supervision and placed into Federal Deposit Insurance Corp. receivership in 2008.
Following the closing of Washington Mutual -- the largest bank or thrift failure in U.S. history, with $307 billion in total assets when it when it failed in September 2008, after which the institution was sold by the FDIC to JPMorgan Chase (JPM) -- the federal government took very strong measures to preclude additional retail runs on bank deposits. The Emergency Economic Stabilization Act was signed into law by President George W. Bush in October 2008, and included the $700 billion Troubled Assets Relief Program, or TARP, as well as a temporary increase in the basic individual limit on FDIC deposit insurance coverage to $250,000 from $100,000. The deposit insurance limit increase was later made permanent.