Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp., has said financial institutions must do more to pare their debt.
Stress Tests
“Large financial institutions still have way too much leverage,” said Bair, who now leads the Systemic Risk Council, a nonpartisan group whose members include former Federal Reserve Chairman Paul Volcker and former Treasury Secretary Paul O’Neill, in a Sept. 11 interview with Bloomberg Television. “We have gotten more capital into these banks as a result of these stress tests, but we were starting from a very low base.”
While record-low interest rates have encouraged lending, they’ve reduced profits. Net interest margin, the difference between what lenders pay for deposits and charge for loans, was 3.06 percent last quarter, near the lowest on record, according to Federal Reserve data on U.S. banks with more than $15 billion in assets. The measure has fallen for 12 of the last 13 quarters.
The central bank has said it won’t raise its target for the Fed funds rate until U.S. unemployment, now at 7.3 percent, falls to 6.5 percent, as long as projected inflation doesn’t rise above 2.5 percent. Fed funds futures show a 63.3 percent probability that interest rates will stay between zero and 0.25 percent 12 months from now.
‘Different Environment’
Even with the highest projected per-share earnings growth among 10 industries, S&P 500 financial firms’ total net income is forecast to reach $183 billion this year, 20 percent below the total in 2006, data compiled by Bloomberg show.
“It is a different environment that they are operating in today versus then and likely this is what they will continue to operate in,” Walter Todd, who oversees about $950 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said by phone Sept. 12. “By definition, returns on equity are going to be lower, and valuations won’t necessarily get back to those levels.”