The Future of Payments

103 BANKING PERSPECTIVES QUARTER 4 2018 it also remains well below its long-run trend. Nonetheless, headwinds arising from tighter banking regulations 1 have likely continued to put downward pressure on loan growth, particularly on loans to small businesses and loans to borrowers with less-than-pristine credit histories. Meanwhile, bank profitability continued to recover, largely because of the reduction in the corporate tax rate and an increase in non-interest income and net interest margins, but profitability remained still somewhat subdued 2 relative to historical standards. The improvement in the asset quality subcomponent was also widespread across all series of the index, including the ratio of net charge-offs to loans and the ratio of loan loss reserves to nonperforming loans. On net, the interconnectedness category also became more resilient, reflecting a lower concentration of bank assets. The decrease in resiliency observed in the liquidity category was driven by an increase in the share of liabilities financed with short-term wholesale liabilities. The increase in wholesale funding over the past year has mostly been driven by other borrowed money with maturities of less than one year. Other measures of liquidity remained roughly unchanged – namely, the share of high-quality liquid assets and the gap between the maturity of assets and liabilities. Thus, despite the recent rise in short-termwholesale funding from historical low levels, U.S. banks continued to have highly liquid balance sheets and sizable liquidity buffers. n ENDNOTES 1 https://bpi.com/bank-regulations-as-a-tax-on-lending/ 2 https://bpi.com/the-record-profit-canard/ EXHIBIT 2: HEAT MAP OF ALL CATEGORIES OF THE BANK CONDITIONS INDEX 1995 2000 2005 2010 2015 AGGREGATE CAPITAL LIQUIDITY RISK AVERSION ASSET QUALITY INTERCONNECTEDNESS PROFITABILITY 0.0 50.0 100.0 MORE RESILIENT LESS RESILIENT Note: Values near 100 (higher resiliency) are shown in blue while values near 0 (higher vulnerability) are shown in red. Source: BPI calculations