banking strategies

U.S. Banks and the Tokyo Drift

Jabulani Leffall — Thu, 21 Oct 2010 12:00:10 +0000

You already know the story, but perhaps it may happen again. It's that familiar.

A nation reeling from popped real estate and financial collapse mopes through a recession and struggles with a crisis of confidence, its president making pledges that everything will be okay.

It sounds like a broken record, doesn't it?

Well, except I'm talking about Japan and the president in question is not Barack Obama but Junichiro Koizumi, and the year in question was 2001, not 2010.

But it is 2010, and parallels to Japanese banking in the 1990s and our banks in the "oughts" now abound.

Four words: bad loans and deflation risk.

That's five words, but it's important to note that recently, U.S. banks such as BB&T and Sun Trust both set up special panels to explore potential exposure to deflation.

Deflation is the general decrease in the price level of goods and services across the board, usually due to a systemic downturn and the resulting desperate effort to cut prices to compete. Deflation also sometimes results from monetary policy that overdoes it in an effort to avoid inflation. Ironic, isn't it?

According to Reuters:

BB&T ran its books through a stress test to gauge the bank's performance in a scenario in which there is deflation for the next 10 years, as part of the bank's own internal projections of various economic scenarios, Chief Financial Officer Daryl Bible said."

Why does Japan in the 1990s keeps coming up?

At the outset of the U.S. crisis in early 2008, the American Enterprise Institute examined Japan's lost decade, about which the think tank says that an "economic cycle driven by a collapse in the market for an asset — such as land or housing — to which the banking system is heavily exposed is a dangerous beast."

That "dangerous beast" was Japan 20 years ago and it ended just 10 years ago. That dangerous beast could also loom here in the U.S. today. The common denominator: bad bank loans were, by and large, the culprit.

As the Reuters piece points out, Japanese banks discovered what is now known as the "lost decade"; deflation means that loan collateral values decline, exacerbating already under-performing loans.

The article goes on to say:

Loans may become more likely to fail, as borrowers tire of paying high rates of interest to finance assets that are worth much less than they had been previously. A second credit crisis could emerge."

If regional powerhouse U.S. banks such as Sun Trust and BB&T — both of which received TARP money and both of which are present in areas hit by rising foreclosures — are either thinking about or hedging against deflation, then it's only a matter of time before cheap money and sluggish economic growth increases the possibility of making widespread deflation an actual reality.

Indeed, the risk of continued deterioration of already bad loans continue to scare U.S. banks, which have a danger of falling further into hock on outstanding loans to say nothing of the continued "quantitative easing" at the U.S. Federal Reserve and currently low Treasury yield curves.

Who better to explain what might happen than Bank of Tokyo-Mitsubishi UFJ, Japan's largest bank and "lost decade–bad loan" poster child?

According to a Bloomberg piece earlier this summer, the bank's proprietary trading chief Kenichi Imai had this to say:

With the effect of government stimulus measures wearing off, the U.S. economy may face a prolonged soft patch, rather than a double bottom."

Soft Patch? Opposite of a hard patch? Flaccid? Sounds maybe a little bit, I don't know...deflated, even.

Let's hope not.

As Bill Isaac, chairman of LECG Global Financial Services and a former FDIC chairman, points out, deflation is not good given that U.S. banks are still assessing non-performing and under-performing loans and testing their balance sheets against deflationary scenarios.

Think you've heard this already? Just wait.

This article is from Jabulani Leffall of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Financial IQ Test: How Healthy Are Your Bank Accounts?

Nora Dunn — Tue, 19 Jan 2010 15:00:02 +0000

I was chatting with a friend the other day who couldn’t tell me exactly why she has three separate bank accounts, what the monthly and transactional fees were, or some of the basic terms and conditions. In a few short minutes, we found a way to save her over $300/year on unnecessary banking expenses, earn more interest, save paper (you gotta love those incidental environmental benefits), and to simplify her banking so much that it no longer seems daunting.

How do you measure up?

Following is a Financial IQ Test, designed to help you determine how healthy your bank accounts — and your interaction with them — are. Simply look at each statement, and answer them with a YES, NO, or NOT SURE. Keep track of your answers, and we'll see how you fare. Then you can reference some relevant articles on the topics you need some refreshers on.

FINANCIAL IQ TEST: How Healthy are Your Bank Accounts?

Knowledge/Awareness

I know how much money (within $10) is in my bank accounts at any time.

I know the rate of interest my bank accounts earn.

I am aware of the overdraft terms and conditions for my account.

Maximizing Value

I have a separate high-interest account for short term savings.

I regularly transfer any excess funds in my chequing account to my high-interest short-term savings account.

I have two or fewer bank accounts (in my name only).

I have less than $3,000 in my chequing or (low-interest) savings account.

Fees

I know how much my monthly bank account service charges are, and what I get for it.

I know what I can do to avoid the monthly bank account charge (if possible – eg: maintain a minimum balance), and I do this each month.

I have an ATM nearby that is linked to my financial institution and doesn’t charge fees for withdrawals.

I don’t pay fees for debit purchases.

Transactions

I can write a cheque if I need to.

I know how to balance my chequebook (to ensure I don’t go into overdraft if somebody takes a while to cash my cheque).

Paying my bills is easy (logistically), and fee-free.

I never go into overdraft.

I have direct deposits and deductions set up where possible.

Security

I read my bank statement at least once a month to ensure there aren’t any suspicious transactions on it.

My PIN number is committed to memory and kept securely at home somewhere.

I shred my bank statements when I get rid of them (if I receive paper statements at all).

The bank has my current address and contact information.

I know what to do if my debit card is lost or stolen.

Scoring

Did you keep track of how many times you answered YES, NO, and NOT SURE? Great! Give yourself the following points for each answer:

YES = 4 points

NO = 0 points

NOT SURE = 2 points

Analysis

Score 0-30

Aha! You like to play the ostrich game with your bank accounts: bury your head in the sand and hope everything works out! With a little bit of awareness of the banking tools at your fingertips, you can probably save money on unnecessary banking fees, earn more interest, and protect your accounts better from fraud or security threats.

Score 31-60

You’re not doing badly, but you could stand to know more about your money and how it can work for (or against) you. Take some time to read the fine print, familiarize yourself with the rules of engagement of your banking institution, and ensure you aren’t paying more than you need to for the services you want.

Score 61-84

Excellent! You have a good general awareness of your banking habits, you try not to pay anything in fees if you don’t have to, and you manage your short-term money effectively. Keep this solid foundation moving in the right direction by continuing to educate yourself, staying on top of your bank’s policies and procedures, streamlining your banking practices, and ensuring you are getting the best bang for your buck every day.

Resources to Raise Your Scores

The First Step to Budgeting

Avoid Bank Fees

An Introduction to High-Yield Reward Checking Accounts

Banks Manipulate Your Transactions: May Charge You $1750 Overdraft Fee

10 Tips to Lower the Cost of Banking

Separate Bank Accounts: Till Death — or Banking — Do We Part?

Is a Prepaid Debit Card Really Cheaper and Better than a Bank Debit Card?

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: