The risk is greater for longer-term debt securities. Investments in debt securities typically decrease in value when interest rates rise. A fund that concentrates its investments within one country, one sector, or a small group of industries, such as Japan, Technology, Financials, or Energy, may be subject to a higher degree of market risk. A non-diversified fund, which may concentrate its assets in fewer individual holdings than a diversified fund, is more exposed to individual stock volatility than a diversified fund. The Focus, Total Return, Balanced, Large Cap Financial, Small Cap Financial, and Midstream Funds are considered non-diversified funds. Investments in foreign securities may involve political, economic, and currency risks, greater volatility, and differences in accounting methods. Small and medium-sized companies may have more limited liquidity and greater price volatility than larger companies. Current and future holdings are subject to risk. For companies in the S&P 500 Index, total debt is still lower in dollar terms than it was in 2006, and as a percentage of total assets, it was just 25% at year-end 2018 compared with an average of over 37% in the seven years leading up to the Financial Crisis. Corporations have deleveraged their balance sheets over the last decade, making it less likely that they will default on loans they do take out.
In illustration, the issuance of mortgage-related securities, an indicator of mortgage lending volume, was lower in 2018 than in all but four of the past 10 years.Ĥ. Banks have kept the housing market supplied with liquidity since the Financial Crisis, but they have been careful not to increase lending too fast and risk facilitating a bubble in home prices, which might cause loan defaults to rise when it deflates. Although low-deposit mortgage products are again available, the more high-risk variations have virtually disappeared, and the average American’s credit score is over 700, a level considered “solidly good.”ģ. In the residential mortgage market, the banks, working together with government agencies like Fannie Mae and Freddie Mac, have kept credit standards stable. New government regulations now require the largest banks to hold up to 9.5% of their assets in cash and other liquid assets, meaning leverage ratios today are roughly 10 to 1, leaving banks in a much stronger position to weather the next downturn.Ģ. Some large financial institutions had leverage ratios of roughly 50 to 1 – in other words, they only had $1 in capital to protect against every $50 in loans. Before the Financial Crisis, bank capital requirements were fairly loose. However, we believe a few factors in particular have helped put the industry in a stronger position than in the past, and have contributed to the banking industry’s ability to achieve rising rates of return on equity (12.4% in the third quarter of 2018 versus 7.9% in 2011), while maintaining conservative levels of risk.ġ. The slow but steady resumption of economic growth following the recession in 2008/2009 drove much of the recovery in the banking industry over the last decade. Both indicators are now consistent with levels seen during more “normal” periods of economic expansion, and they show an industry that has been operating at solid levels of profitability during the last four years of this economic expansion. banking industry’s return to health following one of the worst cyclical downturns in its history. These two indicators have charted the U.S. In the third quarter of 2018, NPLs accounted for just 1.0% of total loans. At the peak of the last recession, in the first quarter of 2010, NPLs for U.S. Non-performing loans (NPLs), or loans where the borrower is no longer paying interest or principal or both, have also declined precipitously over the last ten years. economy has staged a long recovery following the deep recession in 2008/2009, the number of bank failures has declined significantly, dropping from a peak of 157 in 2010 to just eight in 2017. So, what are they telling us about the state of the banking industry in 2019?Īs the U.S. They are just as indicative of conditions in the industry today as they were in 2009. Two metrics, the number of bank failures and the ratio of non-performing loans to total loans, were watched closely during the last recession. New regulations and lending practices mean banks are potentially in a stronger position to weather the next downturn.Banks have achieved solid levels of profitability while maintaining conservative levels of risk.Bank failures have declined and loan quality has improved over the last decade.
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