The Federal Open Market Committee is to blame for the rising risk in bank loan portfolios, according to a new industry report. The FOMC is responsible for setting the Zero Interest Rate Policy; in place for years now.
Kroll Bond Rating Agency’s report stated that the FOMC “explicitly set a policy to push up asset prices to facilitate greater risk taking.”
The problem is that these higher asset values have not been validated by the performance of the economy, either in terms of rising income or GDP.
Which means, when valuations for commercial and residential assets are rising faster than income or GDP, and LTVs are rising as well, the only certainty is that the prices will not be maintained.
The results from KBRA’s study of data published by the Federal Deposit Insurance Corporation made it believe that “there are clear signs again of mounting future credit risk present in the zero or low default rates being reported by the banking industry.”
KBRA said this threat too closely resembles the situation America got into nearly 10 years ago. “During the height of the mortgage bubble in 2004-2005, obligors such as Washington Mutual and Countrywide actually reported negative defaults, meaning that recoveries exceeded charge-offs, suggesting that credit had zero cost,” the report stated.
Now, the report stated that falling market prices for oil, copper and other key industrial commodities have cut the value of collateral by more than half over the past year, raising the specter of increased corporate defaults and related collateral damage for lenders and investors.
“The deflationary environment facing the global economy has been explicitly orchestrated by the policies of the FOMC, which has pushed up asset prices (and compressed credit spreads) to foster economic growth,” the report said.
Loan categories to be concerned about: construction & development, 1-4 family mortgages and multifamily loans are showing signs of stress.
“Plainly stated, the credit results measured by metrics such as charge-offs and recoveries are simply too good to be believed – or sustained,” the report said.
Last month the FOMC voted to table an interest rate hike, and after the horrible September jobs report most think the chance for a rate hike at the Oct. 27-28 FOMC is remote. The next FOMC meeting after that is Dec. 15-16.