…is unemployment apparently (and not even their own).
From the Wall Street Journal today:
Despite all the pain in the financial sector, bank executives’ biggest fear has yet to materialize. Now, it is rearing its ugly head.
Bankers’ worst nightmare is the unemployment rate climbing toward 10%, a level at which credit losses could balloon unpredictably because of high defaults among people with previously strong credit histories.
Precedent shows that a percentage point increase in the unemployment rate leads to roughly a percentage point increase in the charge rate — the amount of defaulted loans written off at a loss. So an increase in unemployment would lead to more writedowns, and more pressure on banks’ capital. That might not be much of a surprise, but the WSJ story goes further:
… as unemployment exceeds 9%, bankers think charge-offs will start to increase by more than the increase in unemployment. The reason? A high rate could cause an unprecedented wave of defaults among prime borrowers, who tend to have bigger loan balances.Economists like Merrill Lynch’s David Rosenberg and Paul Kredrosky (via figures collected for Reuters) are already suggesting that the real unemployment rate has risen to something like 13.5 or 16.5 per cent per cent (charts below, click to enlarge). In comparison, a low estimate of unemployment during the Great Depression puts it at something like 12.5 per cent, when consumer leverage was barely an issue. The stuff of nightmares indeed.
Related links:
Bankers’ fear of unemployment - WSJ
Depression *alert* - FT Alphaville
Brace yourselves for record corporate defaults - FT Alphaville
