S and L Crisis Revisited...
The rising tide of mortgage losses understandably draws comparisons to the savings and loan crisis of the late 1980s. After all, each involved loose real estate lending, unrealistic assumptions about property price appreciation, and ultimately, saddled lenders with heavy losses.
If this analogy holds up, we should brace ourselves for a long, hard slog. As late as 1991, several years after the S&L crisis was first acknowledged, Fed chairman Greenspan lamented the “headwinds – primarily generated by the constriction of credit in response to major losses at banks” – retarding our economic progress.
But while qualitatively similar, the two episodes are quantitatively not alike. First, consider the size of the loss. According to the FDIC, the magnitude of S&L losses was $153 billion, though total real estate losses (including other banks and investors) were obviously much higher. By comparison, industry estimates put the full magnitude (to all lenders) of today’s mortgage losses between $200 and $300 billion. Some estimates go higher, but they usually employ double counting (e.g. the mortgage losses PLUS those taken on related, synthetic derivatives).
So, if we take the smallest estimate of previous losses and the largest estimate of current losses, the difference is a factor of two. Between 1989 and 2007, however, the economy expanded 2.5 times, meaning that even this hyper-conservative accounting makes prospective mortgage losses smaller in relation to the economy.
Second, the banking system is now far healthier than was then the case. Even after the large losses booked so far this year, for example, total loan losses at banks amounted to just 0.56 percent of assets. In contrast, loan losses averaged 1.15 percent of assets from 1985 to 1993, and the best year during that period (1993) experienced a loss rate of 0.86 percent.
Meanwhile, banks have increased their capital – which serves as a cushion against loan losses – tremendously. During the second half of the 1980s, equity capital consistently wallowed below 6 percent of assets. But that same measure of capitalization has persistently exceeded 10 percent in recent years.
Third, the evidence on bank lending is encouraging so far. While banks have certainly tightened underwriting standards and increased the “spread” on business loans over their costs of funds, these changes should be viewed in the context of very easy lending that prevailed just earlier this year. By any longer historical perspective, loans to smaller and medium-sized businesses are available and affordable.
More to the point, they’ve been growing by leaps and bounds; business lending by banks posted faster growth over the past six months than any time since 1973. While some of this growth resulted from troubled investment funds running up credit lines at banks, even smaller banks, that do no such lending, have experienced double-digit growth rates.
None of this, of course, should trivialize impending loan losses or their adverse macroeconomic implications. But a replay of the S&L crisis, this surely is not. (12/20/2007)
NATIONAL CITY CHIEF ECONOMIST RICHARD J. DEKASER
Ranked by USA Today as the nation’s No. 1 Economic Forecaster.
Visit his websites at www.nationalcity.com and
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