Going back several decades, around every 7 years there is a banking crisis brought on by a loan bubble. A few examples include: real estate investment trusts, 3rd-world loans, leveraged buyout loans, savings and loan companies, residential real estate, commercial loans, trailer park loans, and car loans.
Banks just happen to have impaired balance sheets around every 7 years and we happen to be coming up on year 7 from the sub-prime housing loan crisis of 2007. Each loan crisis hits a different segment of loans, but there are a few current warning signs.
- Car loans have maturity terms longer than they have ever been
- There is a new classification of worse car loans: deep-subprime
- Britain has increased home loans 37% so far this year
- Commercial loans with fewer covenants has increased by 55% over the last 2 years
- Canada’s household debt-to-income ratio is very high and continues to rise
- U.S. student loan debt is over a $1.2 trillion and default rates are increasing
I asked a banking finance professor about this 7 year cycle and, offhand, he surmised that 7 years is just enough time that the lenders that learned hard lessons during a crisis have moved up or to different departments. So there is little institutional memory or knowledge on the front lines, where it is needed, to head off the next crisis that is building up.
What will precipitate the next banking crisis? I have no idea but there are plenty of candidates near the precipice. Unfortunately, the bank in the worst financial shape is the U.S. Federal Reserve: old junk mortgage loans, leveraged 50:1 on its capital, no marked-to-market accounting, and to keep interest rates down it is buying up so many loans that it is shrinking market liquidity. Are your finances in good shape for the next financial crisis?