As the world’s three largest
central banks take turns this week to show how they propose to remove
the emergency support from asset markets, markets are already behaving
as though financial risk has grown much higher.
central banks take turns this week to show how they propose to remove
the emergency support from asset markets, markets are already behaving
as though financial risk has grown much higher.
Post-crisis,
financial regulators decided to nominate a select few GSifis (global
systemically important financial institutions). Because these groups
were so systemically important, at least within their own markets, they
would need to be regulated more tightly, or required to keep a bigger
capital cushion, than other banks or insurers.
financial regulators decided to nominate a select few GSifis (global
systemically important financial institutions). Because these groups
were so systemically important, at least within their own markets, they
would need to be regulated more tightly, or required to keep a bigger
capital cushion, than other banks or insurers.
This
tends to reduce their profitability, which is why executives resist the
status but should drastically reduce the risk that they crash. In the
phrase everyone learned 10 years ago, they were too big to fail. The
GSifi status makes them more attractive as bond investments, but less
attractive to equity investors.
tends to reduce their profitability, which is why executives resist the
status but should drastically reduce the risk that they crash. In the
phrase everyone learned 10 years ago, they were too big to fail. The
GSifi status makes them more attractive as bond investments, but less
attractive to equity investors.
There are any number of arguments over exactly which institutions
should make the list, and some crafty lobbying has gone into ensuring
that a few names are not labelled GSifis. But as it stands, there are 40
GSifis. And if this list were turned into its own stock market index,
it would be doing very poorly, even as tech stocks hit new records and
main indices enjoy steady recoveries from February’s sudden sell-off.
If
we weight the 40 GSifis by market cap (so as not to overstate the
impact of some sharp recent falls for relatively small European
institutions), then London’s Absolute Strategy Research shows that from
the market top on January 26 until May 31, they lost $800bn in market
capital, or about 18 per cent. That is virtually a bear market. Some 16
of them remain more than 20 per cent down from their 12-month highs.
we weight the 40 GSifis by market cap (so as not to overstate the
impact of some sharp recent falls for relatively small European
institutions), then London’s Absolute Strategy Research shows that from
the market top on January 26 until May 31, they lost $800bn in market
capital, or about 18 per cent. That is virtually a bear market. Some 16
of them remain more than 20 per cent down from their 12-month highs.
These
numbers are slightly worse than for the banking system as a whole, and
suggest nerves that systemic risks are returning. Tightening monetary
policy may already be having an effect.
numbers are slightly worse than for the banking system as a whole, and
suggest nerves that systemic risks are returning. Tightening monetary
policy may already be having an effect.
The
US yield curve — the excess of 10-year over two-year Treasury yields —
is now its flattest since 2007. This hurts the profitability of banks
who make money by borrowing at short-term rates and lending at longer
rates. The flat yield curve also implies that the Fed will tighten too
much in the short run, and then have to ease policy in the longer run.
US yield curve — the excess of 10-year over two-year Treasury yields —
is now its flattest since 2007. This hurts the profitability of banks
who make money by borrowing at short-term rates and lending at longer
rates. The flat yield curve also implies that the Fed will tighten too
much in the short run, and then have to ease policy in the longer run.
But
the problem is primarily outside the US, where Prudential Financial is
the only GSifi still down as much as 20 per cent from its peak. Most of
the worst affected are in the eurozone, where the problems of the
banking system have long been well known. The imbroglio over the new
Italian government, even if it has calmed somewhat since the new finance
minister ruled out any attempt to leave the euro, has made things
worse. Certain specific banks, notably UniCredit and Deutsche, have
their own idiosyncratic problems.
the problem is primarily outside the US, where Prudential Financial is
the only GSifi still down as much as 20 per cent from its peak. Most of
the worst affected are in the eurozone, where the problems of the
banking system have long been well known. The imbroglio over the new
Italian government, even if it has calmed somewhat since the new finance
minister ruled out any attempt to leave the euro, has made things
worse. Certain specific banks, notably UniCredit and Deutsche, have
their own idiosyncratic problems.
Twenty
years ago, before both banks made a number of huge acquisitions,
Deutsche’s market cap was slightly higher than JPMorgan’s. The US bank
is now roughly 10 times larger.
years ago, before both banks made a number of huge acquisitions,
Deutsche’s market cap was slightly higher than JPMorgan’s. The US bank
is now roughly 10 times larger.
But
this cannot be dismissed as a group of idiosyncratic problems. Banks in
China, where the authorities are hoping to deal with the debt overhang,
and even Japan, whose central bank is still stimulating with full
force, have also seen big falls in their share price.
this cannot be dismissed as a group of idiosyncratic problems. Banks in
China, where the authorities are hoping to deal with the debt overhang,
and even Japan, whose central bank is still stimulating with full
force, have also seen big falls in their share price.
However,
ASR points out that the loss of confidence in the GSifis overlaps
closely with a decline in the global real money supply. In other words,
it could reflect a shortage of dollars. Even if US banks are not much
affected, the GSifi problem could emanate from the US.
ASR points out that the loss of confidence in the GSifis overlaps
closely with a decline in the global real money supply. In other words,
it could reflect a shortage of dollars. Even if US banks are not much
affected, the GSifi problem could emanate from the US.
A
shortage of dollars has shown up in rising short-term dollar Libor
rates. It could be an artefact of quantitative tightening, as the Fed
removes money from the market by selling bonds from its portfolio. Last
year’s tax reform to encourage US multinationals to repatriate their
cash could also be a factor; dollar balances previously held in non-US
banks have shifted, making it harder for foreign banks to access
dollars.
shortage of dollars has shown up in rising short-term dollar Libor
rates. It could be an artefact of quantitative tightening, as the Fed
removes money from the market by selling bonds from its portfolio. Last
year’s tax reform to encourage US multinationals to repatriate their
cash could also be a factor; dollar balances previously held in non-US
banks have shifted, making it harder for foreign banks to access
dollars.
Alternatively,
the move away from the equity of GSifis could reflect concern over
widening US credit spreads, which have risen from a very low level.
Eurozone asset managers are particularly heavily exposed to US credit at
present, arguably because the European Central Bank has given them
little choice but to look abroad to take risks.
the move away from the equity of GSifis could reflect concern over
widening US credit spreads, which have risen from a very low level.
Eurozone asset managers are particularly heavily exposed to US credit at
present, arguably because the European Central Bank has given them
little choice but to look abroad to take risks.
This
is hard for central banks. They have lived in fear for 10 years of
misjudging, pulling off support too quickly, and provoking another
crisis once more. Problems for the GSifis could yet prompt them to slow
down or reverse their tightening of monetary policy.
is hard for central banks. They have lived in fear for 10 years of
misjudging, pulling off support too quickly, and provoking another
crisis once more. Problems for the GSifis could yet prompt them to slow
down or reverse their tightening of monetary policy.
