The One Bank I Worry About

Shrinking Bank Revenue

RBS $6.4 Billion Asset Sale

Earliest Indicator Of Failure Is Deteriorating Earnings

In a fiat world, shrinking bank revenue and earnings ultimately spells trouble for the economy.

Systemic risk in the banking system continues to climb, in my view, almost unnoticed by investors, as QE dumps massive amounts of liquidity into the economy.

As I have long argued, additional liquidity will never, never solve an insolvency problem.  It matters not the size of the firm in question, whether the solvency issue is for; an individual, municipality, publicly traded company, state, or sovereign nation, the solution is the same - austerity through spending reductions and asset sales.

Liquidity can give the illusory appearance of solvency, particularly with a fiat currency, and cover up terrible structural problems for some time.

But the unaddressed structural problems do not disappear through wishful thinking.
Hope for an immaculate recovery of the banking system and overall economy is not a strategy.

We now read headlines like the following: Bulls At Pre-Lehman Levels

Yet, how have the structural issues been addressed?
Banks are still leveraged out past the lunar orbit, and both individuals and governments are carrying extreme debt loads.

This is not the recipe for recovery, but for disaster.

The only thing missing is the right trigger.

This is why I will be vigilant tomorrow when the Royal Bank of Scotland, one of the most systemically important banks in the world, announces its Q3 earnings.
This bank appears to be vulnerable to a relapse into negative earnings territory.

While some analysts see a profitable Q3 for it for the first time in many quarters, this 80% plus UK government owned bank has been losing so much money for so long, it appears possible that it will produce a Lehman-like event as some point.

For those who are interested, the third link from the top of this post is a very good article by the St. Louis Fed that describes the earliest indicator of bank failure - a deterioration in earnings.

Update Nov 5:
From Forbes -

LONDON -- Royal Bank of Scotland has reported fundamentally decent numbers for its third-quarter, but "volatile" accounting charges, as its CEO put it, means it slipped back into the red with a net loss of £1.2 billion ($1.9 billion), having booked a net profit of £257 million in the previous quarter.

The loss comes from fair value accounting charges on RBS's own debt, totaling £858 million ($1.4 billion). Without the charge the bank would have reported an operating profit of £726 million ($1.2 billion), it said in Friday's interim management statement.