The U.S. Banking Industry in 2011: Credit Extension, Funding, Earnings, and Capital Prospects

Abstract

Our research addresses the issue of the likely nature of financial system activities by the end of 2011. Our specific focus is on the banking industry, although our analysis begins by considering the likely role of banks relative to other credit providers in the financial system. We employ a simple, straightforward methodology, relying mostly on Flow of Funds data to develop a broad, “bird’s eye” view of past and likely future banking industry activity. Conceptually, our main tack is to ask what banking industry activity would look like by 2012, were the industry to return to the trends underway before the housing price bubble took hold (i.e., pre-2001/2002). Using that artifice to approximate reasonably stable banking activity, we calculate the nature of banking activity across four dimensions: 1) credit extension and other asset-side activities; 2) funding (i.e., liability-side activities), and in particular whether projected funding is likely to be adequate to support projected credit extension; 3) banks’ capital position, were they to maintain at least the historically high tangible equity capital-to-assets ratios attained by the end of 2009; and 4) banks’ earnings prospect, and whether in particular earnings are likely to support necessary capital accumulation.