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Low Bank Capital Is the Next U.S. Crisis – Why Private Capital Will Rule The Markets

One of the largest financial problems for the U.S. in the next ten years will be the lack of adequate lending capital from banks. Most large financial firms have become so highly leveraged they have little real equity relative to their assets.

As banks take back more and more REO residential and commercial properties the more capital they must hold in reserves relative to those liabilities. This equates to less capital available to loan to the residential and commercial real estate markets. Banks must hold anywhere from 3:1 up to 7:1 reserves against their booked REO properties based on their capitalization. Tightening regulations make banks find any excuse to not lend money. Remember 0% credit card offers? Not anymore.

One news sources indicated that US banks are still cautious to lend. Banks in the U.S. kept credit fairly tight in the final months of 2011 even as demand for loans rose, a move that’s likely to put a dampening on the already slow economic recovery.

Every quarter the Fed surveys senior loan officers at banks. After loosening loan standards over the past couple of years, banks started to tighten standards in the second HULT PRIVATE CAPITAL half of 2011.

There is a plan for a bank’s toxic debt. Analysts from FBR Capital Markets said eight of the largest U.S. financial institutions need up to $1.2 trillion in new common equity and that the government is the only entity that can provide bridge capital to get past the current credit crises.

Debt maturity will bring about more distressed opportunities for needed equity. According to a top source, the $1.2 trillion of debt that will come due between 2012 and 2015 will present more distress opportunities for equity players.

Our fragile economic system is now inundated with the negative impact of Foreclosure-Gate, banks being called to the carpet due to fraudulent robo-signings, as well as the bulk selling of mortgage packages on the secondary market that include document deficiencies and the lack of reps and warrants. Adding fuel to the fire, there is the ultimate hand tying of banks by the Dodd-Frank Act. It’s no wonder that capital will seem as precious as gold itself.

How many investors have lost investment opportunities simply because capital wasn’t readily available? Yes, it’s going to get much worse with term & maturity defaults continuing to rise, including defaults in the commercial back mortgage securities market hitting critical mass by 2017

 

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