Tuesday, January 22, 2008

It Depends on your definition of "U.S. Bank"

by Ken Houghton

Via Mark Thoma, "don't worry, be happy" from John Berry at Bloomberg:
With all the large writedowns and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are.

That inattention has raised unnecessary concerns that the banks may be so crippled by losses that they will cut lending to the point it might undermine the U.S. economy.

Some commentators have said the banks are in the worst shape since the Great Depression. That isn't close to being correct.

Nor is it strictly correct that the bank all were profitable in the United States. Citigroup, for instance, only made money due to its international presence (PDF link).

Why is this important? Because if you're going to claim that banks will not "cut lending to the point it might undermine the U.S. economy," then you have to show that it is in their best interest to make those loans.

In Citi's case, the overall answer was clear: It's not. It might be a little better 75 bp lower—or it just might be less of a case of "making up in volume what we lose on price."

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