May 29, 2022 | Premium Service | With this issue of The Institutional Risk Analyst, we introduce a new format for our quarterly review of the US banking industry. By popular demand, we are now publishing The IRA Bank Book in PowerPoint, making the charts easier to read and forcing your dutiful publisher to be very concise. Subscribers may share the IRA Bank Book within your organization.
In this issue, we describe the migration of the banking industry back to 2019 levels of operating income. Why did bank stocks out-perform perform in 2021? Because the banking industry spent much of the year repatriating $60 billion in loan loss reserves taken in 2020 back into income. Why did financial stocks soar in 2021? Due to GAPP adjustments to income because of COVID and the FOMC's radical asset purchases which suppressed credit costs.
Now we go the other way on the financial roller coaster. The special adjustments to GAAP income are behind us and many asset classes remain rather considerably over-valued, like loans and mortgage servicing assets. This prepares the world of financials for a year of rising funding costs and credit expenses, falling asset prices and eventually, hopefully, higher asset and equity returns after the nuclear winter of quantitative easing or QE.