A Big Bank Regulator and a Big Bank: Both Warn of Financial Risks

• A Big Bank Regulator and a Big Bank: Both Warn of Financial Risks 
  by Pam Martens and Russ Martens, http://wallstreetonparade.com/  
  It’s not every week that the regulator of the biggest banks in the U.S. and one of those biggest banks are both warning of growing financial risks.
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  On Sunday, Bank of America – the parent of Merrill Lynch and its more than 15,000 financial advisors – released a report calling the outlook for markets next year “perilous” and warning that “markets have not priced in quantitative failure.” The report came from Michael Hartnett, Bank of America’s Chief Investment Strategist and his team.
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  Yesterday, Thomas Curry, head of the Office of the Comptroller of the Currency (OCC) which regulates all national banks in the U.S., gave his second speech in a week and a half, using both occasions to warn of increasing credit risks at the biggest banks.
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  Curry spoke yesterday at the Risk Management Association’s annual conference in Boston. Curry dropped a significant bombshell on the audience, stating:
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  “Just over the last two years, the key ratio of the loan loss allowance to total loans dipped by more than 40 percent. Although banks have argued, with some justice – and please note the qualification – that improvements in loan quality justified those reserve releases, drawdowns of that magnitude are clearly disproportionate…”
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  On October 21, Curry told an audience at an Exchequer Club luncheon in Washington, D.C. that “we are clearly reaching the point in the cycle where credit risk is moving to the forefront.” Curry said potentially problematic areas include leveraged loans, home equity lines of credit, subprime auto loans, and commercial real estate.
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  The first obvious thought that arises is that the big banks may be padding their profit picture by under-reserving for loan losses. The second thought that arises is why their regulator is allowing them to do that when he is simultaneously conceding that credit risk is accelerating. The final thought is that Curry may hail from the same school of cognizant capture as Bill Dudley, President of the New York Fed, believing that jawboning will whip the serially malfeasant banks into shape. That’s the fantasy-land view that played a significant role in the 2007-2009 financial crash, culminating in the greatest economic implosion since the Great Depression.
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  According to an article at Bloomberg Business yesterday, Bank of America’s Michael Hartnett is calling attention to how much central bank policies of zero rates and quantitative easing, which globally have injected $12.4 trillion of liquidity into markets, have done for Wall Street while shortchanging average Americans. If that sounds like a nuanced rendition of the Occupy Wall Street message of “Banks got bailed out, we got sold out,” well, uh, it is.
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  read more.

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