Monday, January 18, 2016

Energy loans are now causing systemic risks to US banks

"The Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated 'under the table' that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches."
Zero Hedge, January 18,2015
That's more like it!  There is no doubt that the US bank's exposure to the drilling sector was large. Ideally, for the banks was to issue bonds (Junk, but they like to call them High Yield...) that was the feed for the US energy sector over the past 5 years.  Almost any project was fundable, because extraction costs were around $50/$60 and prices were around $80/$90.  As of 9:00 am today oil prices (WTI) are trading around $29.95, so that producers are maximising output so as to pay variable costs.  However, banks still "normally" would show loan impairment.  Covenants are breached and the prudent thing is to take loan loss provisions, that would reflect in a mark to market of the loans -- now it appears that there is, like in 2008, an agreement to "suspend" this mark to market rule, so as to not impact Tier one capital.

Now, that's a worrying development.  The implication is that banks have sufficiently large exposure to the E&P sector, which is clearly distressed, so as to have Tier one implication for the banks. Shows that the regulator took the line and the sinker, when it agreed to banks excessive exposure to that sector.  Compare this to Canada, where the Oil Sands business is far more affected, but where the banks are only discussing minor impairment in the Western portfolio.

The US is not in a recession, granted growth is not as robust as it could be, but it is still positive.  Yet the banks are forced to take action on their mark to market rules as to avoid impairment.  This indicate that the banks were, once again, imprudent in their lending activities... I saw the big short a few nights ago, nice story, but it shows that the banks have learned once lesson very well, privatize the profits and socialize the losses -- the American tax payer is a sucker, and should be exploited.


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