Reports Show Banks Are Skinny Dipping

The economy has looked better as of late but new data shows that Americans have suddenly stopped paying their credit-card bills. According to a report from Moody’s, in the past two fiscal quarters, financial institutions reported a steep increase in charge-offs — debt that hasn’t been collected.

This may say more about banks than borrowers, though.  The largest increase in charge offs since the financial crisis highlights the fact that banks have started to loosen their standards and issue credit more aggressively. 

In 2009, banks were struggling and turned risk off.  They tightened their lending requirements and raised rates.  Then, as their default rates began coming back to normal, competition began slowly taking more risk by providing credit cards to riskier borrowers at lower rates. By now, most borrowers can get a decent credit card rate if they shopped around and, as the Moody’s report suggested, banks are beginning to pay the price.

 

Eventually, this will lead to more intense consequences.

 

Economist Hyman Minsky argued that economic stability was unattainable.  In unstable times (like during/immediately post financial crisis), people and institutions become risk averse.  They make sure they are compensated for taking risk and tend to err on the side of caution. Due to better decision making, over time, the environment becomes more stable.  Stability causes individuals and institutions to become complacent and, in turn, take on more risk or require less return for doing so. Eventually, risky behavior backfires and we’re back to square one.

While many of his peers blasted him when he introduced this theory, Minsky is now considered one of the greatest economists in history.  Easy access to capital (due largely to low interest rates) has caused individuals and companies to make risky decisions as of late.  Whether over consuming, investing in unproven companies or buying back their own overpriced stock, poor decisions eventually backfire. 

As Warren Buffet said “Only when the tide goes out do you discover who's been swimming naked.”

Happy Skinny Dipping