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Old 12-19-2010, 09:24 PM
 
Location: Nebraska
188 posts, read 250,661 times
Reputation: 286

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This question is directed to those that work in a high financial position within a bank or have studied bank panics of our nations history. I have a scenario/question that I can't seem to answer. Lets assume we take a well capitalized bank (low debt/equity ratios and capitalization ratios well above what the government would deem necessary) and insert it into our current economic climate. Now assume (hypothetically) we reach a period, in the future, where interest rates climb to levels similar to that of the early 1980's. And we assume the interest rate hike is a result of the Fed trying to reign in inflation (thus we are in a high inflation environment). In this scenario what happens to the bank?

I would assume the bank would attempt to take in as many new loans as possible, but also try to sell loans in the secondary market as these loans would be underperforming inflation? So in this case the banks would be taking in profits but losing purchasing power as their profits don't outpace inflation.

I guess a simpler way of asking would be to see how banks performed in the early 80's with extremely high interest rates.

Any information that would add to the subject would be welcomed.
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Old 12-20-2010, 10:21 PM
 
Location: Nebraska
188 posts, read 250,661 times
Reputation: 286
Quote:
Originally Posted by hskrfan2187 View Post
This question is directed to those that work in a high financial position within a bank or have studied bank panics of our nations history. I have a scenario/question that I can't seem to answer. Lets assume we take a well capitalized bank (low debt/equity ratios and capitalization ratios well above what the government would deem necessary) and insert it into our current economic climate. Now assume (hypothetically) we reach a period, in the future, where interest rates climb to levels similar to that of the early 1980's. And we assume the interest rate hike is a result of the Fed trying to reign in inflation (thus we are in a high inflation environment). In this scenario what happens to the bank?

I would assume the bank would attempt to take in as many new loans as possible, but also try to sell loans in the secondary market as these loans would be underperforming inflation? So in this case the banks would be taking in profits but losing purchasing power as their profits don't outpace inflation.

I guess a simpler way of asking would be to see how banks performed in the early 80's with extremely high interest rates.

Any information that would add to the subject would be welcomed.
Nobody? Not even educated guesses?
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Old 12-27-2010, 12:02 PM
 
5,630 posts, read 10,639,791 times
Reputation: 4792
Ok, interesting idear, there.

But I R not your expert -- even though I did own / operate a Trust company for a few years. (Those were some fun, fast days, btw.)

I think you have a model of what you are describing in the Savings and Loans "crisis" of the early the 1980's. They had long-term -- often mortgage based -- low interest rate income, and then, as you described, had to compete for deposits into the double digits, when the Fed changed the game.

Since under Reagonomics and the Fed we were not going to deal with the real problem (the US had become an energy importer and we were beginning to sink under the debt load), and instead were going to fudge with the money, the money itself was becoming a toxic problem. The brainless mantra chant of the day (which continued up to the crash two years ago) was De-Regulation! De-Regulation! So that was the claimed fix for the Savings and Loans.

The S&L's were "de-regulated" to go into very risky and insane commercial real estate deals, where properties were "flipped" and prices ran up to provide false profits. (sound like a recent game with the commercial banks?) The old time, moral and decent directors of S&L's were removed from the boards and positions with the older S&Ls so that new "smarter" operators could come in and totally load them with bad debts, and asset strip what was left.

By the late 80's most S&Ls were wiped out shells and the US had found its way into Debt Addiction.

Banks, at the time, were not so much into long-term mortgages, so they did not tend to be trapped in the interest game as severely as the S&Ls were.
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Old 12-27-2010, 12:57 PM
 
Location: Texas
5,872 posts, read 7,504,745 times
Reputation: 2967
In Search of Explanations for Bank Performance — Some Finnish Data — Organization Studies

http://www.fdic.gov/bank/historical/history/3_85.pdf

Not quite totally on topic, but very informational:
http://www.clevelandfed.org/research...q1-thomson.pdf
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Old 05-23-2011, 11:05 AM
 
2 posts, read 2,058 times
Reputation: 10
Talking Those were the days...

Quote:
Originally Posted by hskrfan2187 View Post
This question is directed to those that work in a high financial position within a bank or have studied bank panics of our nations history. I have a scenario/question that I can't seem to answer. Lets assume we take a well capitalized bank (low debt/equity ratios and capitalization ratios well above what the government would deem necessary) and insert it into our current economic climate. Now assume (hypothetically) we reach a period, in the future, where interest rates climb to levels similar to that of the early 1980's. And we assume the interest rate hike is a result of the Fed trying to reign in inflation (thus we are in a high inflation environment). In this scenario what happens to the bank?

I would assume the bank would attempt to take in as many new loans as possible, but also try to sell loans in the secondary market as these loans would be underperforming inflation? So in this case the banks would be taking in profits but losing purchasing power as their profits don't outpace inflation.

I guess a simpler way of asking would be to see how banks performed in the early 80's with extremely high interest rates.

Any information that would add to the subject would be welcomed.
The early 80ties were the times that Banks especially community Banks made a lot of money. Core deposits were cheap and CD's were reasonable in that you could lend at 18 plus 3 and make a killing. But when you are burning up a clients resources at that rate they are forever paying the interest and not the principal which in the end could cause them to fail. There is really two parts to your question you lend deposits so therefore you need a steady and reliable source of them. Core deposits are really the answer here and you need adequate capital to bulk up in the portfolio. Today you are talking about tier 1 levels at 9-11% depending on the Banks safety & soundness rating and more is better. bankalchemist.
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