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Fisher Investments MarketMinder:

A Nice Thought

Central banks remain flexible as credit conditions continue to thaw.

9/3/2010 By Fisher Investments Editorial Staff

Story Highlights:

The European Central Bank (ECB) extended emergency lending measures for banks through January at the earliest.
Although not much needed, the extension should bolster confidence.
Like European banks, US banks today are healthier than 12 months ago, never mind 24 months ago.
Conditions bode well for the continued healing of credit markets, at home and abroad.

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On Thursday, European Central Bank (ECB) President Jean Claude Trichet announced the central bank will extend emergency bank lending measures through January at the earliest. The measures had been slated to end October 12. Tellingly, some folks speculated the ECB’s decision was thanks not just to a fragile European financial system, but also the threat of a renewed US recession—a sign the former is clearly on the wane.

We think the ECB’s decision is nice and all, and the banks who need it will likely breathe a sigh of relief. But, as we wrote here just recently, fewer banks than ever are availing themselves of the ECB’s emergency facilities. Overall, eurozone banks are much healthier than they were when these emergency measures were initiated—thanks, in part, to the added liquidity. But no doubt also because the mere existence of various bailout measures and liquidity facilities helped ease the panic that exacerbated tight credit.

So eurozone banks are healthier, but what about the US? The FDIC recently kicked up a little dust—noting 829 US banks are at risk of failure. Sounds like a lot, but the consequences of a financial panic can last years without again threatening the system as a whole. Bank failures in particular are par for the course after financial crises, and 829 banks are just a fraction of the banks on the watch list in the late eighties and early nineties after the S&L crisis. For the most part, allowing failure benefits the system as a whole. What’s more—US banks are exceptionally well-capitalized—the FDIC recently noted bank profitability is at its highest since Q3 2007.

So kudos to the ECB for their ongoing show of support—which no doubt helps with sentiment. But we doubt they’ll get many ongoing takers.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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