Rising interest rates and a change of U.S. trading policy suggest that money will be treated differently, according to Konrad Hummler. Will it precipitate a return of competition among banks?
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A miracle that will have to come to pass (to some extent, as an unexpected consequence of Donald Trump’s trade policy) is an increase in America’s savings rate. This is a necessary precondition if the current U.S. administration is to achieve its goal of increasing domestic production – as well as an ineluctable consequence of China’s goal of raising domestic consumption.
If the Chinese are themselves consuming more within their own borders, this consumption has to be financed, and the result will be fewer Chinese trade surpluses with the U.S. that can (and must) be repatriated to the U.S. via the capital account of the balance of payments. The People’s Bank of China will acquire fewer Treasuries – and American savers will have to step up to take its place.
It is undoubtedly a propitious omen that American banks have begun to pay their depositors interest again – offering zero or rock-bottom rates (even if they turn out to be positive in real terms), is no way to induce savers to part with their hard-earned cash. Strait is the gate and narrow is the way that leads to any such hallowed outcome, as the Americans are not in the habit of saving.
«The ‹sweet poison› of debt has permeated every level of economy and society in America»
Since the financial crisis of 2008/09, indebtedness in most segments of the U.S. private sector has returned to pre-crisis levels – or even markedly overshot them (viz. corporate loans, auto financing, and consumer credit). Mortgages are more or less back where they were in 2007.
An inflation-free economic boom over the next couple of years is also a prerequisite for the «exercise» to succeed in respect of any increase in the savings rate; significantly higher interest costs would be a millstone round the neck of America’s national finances and seriously impinge upon both private and corporate spending – which would probably be enough to trigger the next financial crisis.
The ‹sweet poison› of debt has permeated every level of economy and society in America, and is now almost taken for granted as part of the furniture. While it proved possible to ward off immediate insolvency with a flood of liquidity in the immediate aftermath of the financial and banking crisis, ultra-low interest rates have only encouraged America to pile on more debt ever since.
«I remain sceptical. Politics is politics»
I thus predict no volte-face in this situation any time soon – people don’t pick up the saving habit that quickly, as it means cutting down on consumption. Nonetheless, interest rate hikes – albeit tentative – and changes to trade policy bespeak a new phase in the way money is treated in both corporate and private America.
It is difficult to say to what extent the state sector will partake in this change of heart, though. I remain sceptical. Politics is politics, and spending money you haven’t earned is far too agreeable for anyone, whether blue or red, to want to give it up.
A further circumstance militating in favor of increased saving among private individuals is that U.S. banks – unlike those in Europe – have emerged relatively unscathed from the financial and banking crisis; savers can trust their banks again. The reason for this is undoubtedly the far-reaching «Troubled Asset Relief Program» (TARP) that was rapidly deployed by the incumbent administration (headed by Bush fils) to recapitalize financial institutions that had hit the skids.
«This stands in striking contrast to Europe; the Old World was dilatory in cleaning up its act»
Legally authorized expenditure of up to $700 billion was not maxed out. Total disbursements amounted to about $430 billion, and there was even a modest, post-disinvestment profit of about $15 billion, once the Treasury had sold off the last tranches of TARP at the end of 2014.
This stands in striking contrast to Europe; the Old World was dilatory in cleaning up its act – regulating all the more rigidly the while – and the banks were to make it back into the black only much later, if at all. There is a good deal of evidence to suggest that «zombie banks» with low-risk (but economically ineffective) balance sheet business were kept alive in Europe even as banks in the U.S. were wiped out, merged left, right and center or – in some isolated cases – even created from scratch amidst the massive upswing in the fintech sector.
According to a study carried out by EY (formerly Ernst & Young), the balance sheet total of the ten largest U.S. banks has almost doubled since 2007, increasing from around $7 trillion to around $15 trillion, during which time the European banks (which were in a far stronger position in 2007) have marked time with a balance sheet total of circa $14 trillion.
«This prerequisite for avoiding economic hardship is contingent on a healthy banking system»
A comparison of profit numbers is even more compelling: in 2007, the ten largest U.S. banks generated profits in the order of $40 billion while their European counterparts generated some $60 billion; nowadays, the profits of the ten largest U.S. banks stand at over $110 billion while those of their European peers are just north of a paltry $24 billion. Thanks to their fat profits, the equity ratio of U.S. banks is substantially higher (7.5 percent) than that of European banks (a scant 5.7 percent).
An inflation-free economic boom over the next couple of years: this prerequisite for avoiding severe economic and political hardship is contingent on a healthy banking system. While the time gained through QE has been spent learning important lessons in the U.S., this window of opportunity has largely been neglected in Europe.
«The conclusion would be: competition is back»
The genesis of the «decoupling» of the stock markets since May this year might thus be located in the clean-up of the banking system that was begun much earlier, under Bush II, before being continued and completed by the Obama administration. The conclusion would then be: competition is back. Policy matters.
This article is an excerpt from the current «bergsicht» 33 with the title «Competition is back» by Konrad Hummler. This is the second last issue. As part of the last «bergsicht» 34, a farewell event will take place on 12 December in the Metropol Restaurant in Zurich. Hummler will present the last issue. He will then take stock of the six years of «bergsicht» together with Kurt Aeschbacher. More information can be found here.
Konrad Hummler joined what today's is known as UBS after his law studies. He was a member of staff of Robert Holzach. In 1989, Hummler together with partners took charge of Wegelin, a Swiss private bank which folded during the Swiss dispute with U.S. authorities on the treatment of untaxed assets. After this incisive event, Hummler started anew. He founded M1, a think tank for strategic questions. Today, the former private banker has several mandates. Recently, he was elected chairman of Private Client Bank in Zurich.
Previous contributions: Rudi Bogni, Peter Kurer, Oliver Berger, Rolf Banz, Dieter Ruloff, Werner Vogt, Walter Wittmann, Alfred Mettler, Peter Hody, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Andreas Britt, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Peter Hody, Albert Steck, Andreas Britt, Martin Dahinden, Thomas Fedier, Alfred Mettler, Brigitte Strebel, Peter Hody, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert Hemmi, Anton Affentranger, Yves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Didier Saint-Georges, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino Borini, Bert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. Rutsch, Dorte Bech Vizard, Adriano B. Lucatelli, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob Roth, Marco Martinelli, Beat Wittmann, Thomas Sutter, Tom King, Werner Peyer, Thomas Kupfer, Peter Kurer, Arturo Bris, Frederic Papp, Claudia Kraaz, James Syme, Peter Hody, Dennis Larsen, Bernd Kramer, Ralph Ebert, Marionna Wegenstein, Armin Jans, Nicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio Quirighetti, Claire Shaw, Peter Fanconi, Alex Wolf, Dan Steinbock, Patrick Scheurle, Sandro Occhilupo, Claudia Kraaz, Will Ballard, Michael Bornhäusser, Nicholas Yeo, Claude-Alain Margelisch, Jean-François Hirschel, Jens Pongratz, Samuel Gerber, Philipp Weckherlin, Michel Longhini, Anne Richards, Michael Welti, Antoni Trenchev, Benoit Barbereau, Pascal R. Bersier, Shaul Lifshitz, Klaus Breiner, Ana Botín, Michel Longhini, Martin Gilbert, Jesper Koll, Ingo Rauser, Carlo Capaul, Claude Baumann and Markus Winkler.
