A question came up on facebook about Bermuda’s debt liabilities in reference to this article. Namely, is Bermuda experiencing an expanding debt crisis in relation to personal loans? The article suggests there are risks that auto loans and leases are increasingly being repackaged and collateralized like was done with home mortgages in the 2008 crash and the reader wondered if Bermuda has similar risks. I hadn’t looked at the deposit vs. loan profile data in years so I thought I’d take a look.
To my knowledge the government doesn’t track or publish auto loan data. The best approximation is the BD$ Deposit vs. Loan Profile data published by the Bermuda Monetary Authority which consolidates all bank loan data.
Here’s what the last few years look like.
What does this tell us? Unfortunately not much about car loans specifically. What it tells us is the condition of the local banks in terms of how many Bermuda Dollars they have deposited vs. how many they loaned out. I’m not aware of any cases where Bermuda’s loans are repackaged into securities like happened in the US. Our market is a bit small for that so it is more a question of direct loan liabilities than collateralized ones which is of far less risk to destabilizing banks as they’re relatively transparent and well known.
From what we can see, historically in terms of Bermuda dollars, local banks loaned out less than they took in deposits. Around 2005 that trend shifted and back in 2008 this writer expressed concerns about the impact 100% financing and interest only loans were having and whether the excess was driving a housing bubble.
It was clear to some that our economy was in for a crash. Our government and banks had their foot pressed firmly on the accelerator at a time when we needed to be hitting the brakes.
Banks get over confident, lend far too much money to people who can’t afford to pay it back and eventually strain our economy with inflated valuations and ultimately bad debt. This kind of bad debt encumbers banks where they’re stuck having loaned out money for properties that won’t be paid back.
In order to free up that undervalued capital they either have to take a loss by selling the assets at firesale prices or come up with a creative scheme to shift bad debt. Shifting bad debt was the theme behind the whole “sub-prime crisis” of 2008 and locally you can see examples with what Clarien appears to be doing with BHC.
So welcome to 2017 where we can see what happens after loans peaked through 2009-2011 and then began a decline. We’re in a process called “deleveraging” which is where banks took on too much and have to gradually reduce their loan books to return to a normal value. If you’re wondering why it is extra hard to get a loan these days this is why. The banks simply have far too much money sunk into bad loans in a market that was overinflated that they’re still trying to sort out.
Does mean Bermuda is experiencing an expanding debt crisis? Not from what I can see. If anything its a good sign that we’re renormalizing after a period of irrational exuberance. Hopefully we’ll see the local markets stabilize, we’ll gradually return to a period of strength and growth and people won’t forget that time we got too overconfident. Though I wouldn’t hold your breath on it.