As Europe braces for the release of its bank stress tests, the world could be on the verge of another banking crisis.
The signs are obvious to all. The World Bank estimates the ratio of non-performing loans to total gross loans in 2015 reached 4.3 per cent. Before the 2009 global financial crisis, they stood at 4.2 per cent.
If anything, the problem is starker now than then: there are more than $US3 trillion ($4 trillion) in stressed loan assets worldwide, compared to the roughly $US1 trillion of US subprime loans that triggered the 2009 crisis.
European banks are saddled with $US1.3 trillion in non-performing loans, nearly $US400 billion of them in Italy. The IMF estimates that risky loans in China also total $US1.3 trillion, although private forecasts are higher. India’s stressed loans top $US150 billion.
Once again, banks in the US, Canada, UK, several European countries, Asia, Australia and New Zealand are heavily exposed to property markets, which are overvalued by historical measures.
In addition, banks have significant exposure to the troubled resource sector: lending to the energy sector alone totals around $US3 trillion globally.
Borrowers are struggling to service that debt in an environment of falling commodity prices, weak growth, overcapacity, rising borrowing costs and (in some cases) a weaker currency.
To make matters worse, the world’s limp recovery since 2009 is intensifying loan stresses. In advanced economies, low growth and disinflation or deflation is making it harder for companies to pay off what they owe.
Many European firms are suffering from a lack of global competitiveness, exacerbated by the effects of the single currency.
Government efforts to revive growth – largely through a targeted expansion of bank lending – are having dangerous side effects.
With safe assets offering low returns, banks have financed less creditworthy borrowers, especially in the shale oil sector and emerging markets. Abundant liquidity has inflated asset prices and banks have lent against this overvalued collateral. Low rates have allowed weak borrowers to survive longer than they should, which delays the necessary pain of writing off bad loans.
In developing economies, strong capital inflows, seeking higher returns or fleeing depreciating currencies, have contributed to a risky build-up in leverage. So have government policies encouraging debt-funded investment or consumption to stimulate aggregate demand.
What’s most worrying, though, is the fact that the traditional solutions to banking crises no longer seem available or effective.
To recover, banks need strong earnings, capital infusions, a process to dispose of bad loans and industry reforms. Yet today, banks’ ability to earn their way out of their problems and write off losses is limited.
Current monetary policy is partly to blame. Zero or negative rates drive down bank lending rates more than deposit rates, which can’t be cut because of the need to maintain deposits and comply with regulatory requirements for stable funding.
Traditionally, banks have built capital by earning the margin between low deposit rates and safe, longer-term fixed rate assets, such as government bonds. Today, the term premium – the difference between short and longer-term rates – has fallen sharply.
Attracting new capital requires that the industry’s long-term prospects be sound. To the contrary, several structural factors are creating uncertainty about the future of banks and may have permanently reduced available returns.
Bank business models in several countries are in need of major reform, which means consolidation and cost reductions ahead. Many countries where banks need assistance remain resistant to foreign ownership, capital and expertise that might help them become more efficient.
Poor institutional and legal frameworks, especially inefficient bankruptcy procedures, discourage new investment in banks or distressed assets. Foreclosures in Italy can take more than four years, compared to 18 months in the US or UK.
In many emerging markets, the pervasive influence of the state among both banks and borrowers complicates the enforcement of claims. Politically connected borrowers can force loans to be rescheduled forever rather than recognised as unrecoverable.
Unanticipated political developments are added complications. Energy prices are affected by geopolitics as much as market forces. The Brexit vote has rippled through the banking system by driving down the pound and radically altering prospects for British financial institutions.
In Italy, political factors are impeding the recapitalisation of banks. European Union procedures require progressively writing down equity, subordinated debt and then senior debt, protecting only insured deposits.
But “bailing in” creditors in this way would result in writing down around $US220 billion of securities held by retail investors, creating a political headache for the government.
At the same time, EU banking regulations as well as budgetary and debt limits make it hard for the Italian government to intervene.
Whether a crisis might begin there, perhaps as some fear with the world’s oldest bank, Monte dei Paschi de Siena, is impossible to say.
But regulators everywhere should be asking themselves some tough questions: Has the financialisation of advanced economies gone too far?
Does the role of banking need to be altered to ensure that such crises are less frequent? Increasingly, the answer to both would seem to be yes.
It’s hilarious to witness the goons at the LNP attempt to lay the blame of the election outcome at the feet of the Labor Party and attribute their monumental drubbing to a single last minute so-called “fear campaign.”
Make no mistake, this entire election campaign was orchestrated by Malcolm Turnbull, endorsed and championed by his sidekicks Morrison, Pyne and Bishop, and it’s those incompetent morons who should be held accountable for its outcome.
For the benefit of those with short memories including Leigh Sales and Chris Uhlmann, it was:
- Malcolm who took the extraordinary step of proroguing Parliament
- Malcolm who insisted that senate reform was necessary
- Malcolm who went to the Governor General demanding a double dissolution election
- Malcolm who insisted on a mammoth eight week election campaign
All this has been executed at great taxpayers’ expense, and now Malcolm finds himself with no mandate to govern, no authority to lead his own party, and a nation facing an impotent government for the next three years.
And if that’s not enough, he’s thrown in Pauline Hanson for good measure.
Of course his ego still thinks he can win, but his political career is over.
The silver lining is that he’ll join his predecessor as one of Australia’s shortest serving Prime Ministers.
With concerns over unchecked immigration, its floundering economy and harsh austerity measures, the British people have given toffee nosed Prime Minister David Cameron “the big finger” and voted to leave the European Union.
Cameron gambled big and lost, with the public rejecting his fear campaign of economic Armageddon should the ‘Leave’ campaign win the vote. It’s a massive snub to his leadership, the political elite and the status quo (not the band).
His position as PM now appears untenable and there’s already speculation that he will be forced to resign.
There are suggestions that the next PM could be former London Mayor, the colourful Boris Johnson, who campaigned for the ‘Leave’ vote.
Questions also hang over what comes next for the nations that make up the United Kingdom that voted to ‘Remain.’
Voters in both Scotland and Northern Ireland voted to ‘Remain,’ unlike Wales and England.
I’ve been ruminating lately with the idea that the world is in a state of complete and utter chaos and it’s only going to get worse.
For those of us who don’t go home from a hard day’s work and then stay glued to episodes of “The Farmer wants a shag,” “The Bachelorette” or the latest reality cooking show, the writing’s fairly clearly on the wall.
For the first time in modern history, today’s emerging generation of twenty somethings will be worse off than generations that have gone before. In Australia, home ownership is a thing of the past with today’s young workers relegated to the very real prospect of renting forever, unless they have access to a hand up from their parents.
Jobs growth is also lacklustre. University graduates find there just isn’t the jobs out there that they’ve studied for and find themselves stocking supermarket shelves or working in IGA for $2 an hour.
Europe is a basket case. With record youth unemployment sitting at 50% in some areas and showing no signs of improving and the entire region a living teeming tinderbox of social unrest, resentment towards immigrants and a resurgence in far right political movements.
China is also languishing with development slowing as the govt realises it can’t afford to build ghost cities that no one wants or can afford to live in. And while the US has seen some recovery since the GFC it’s hard to see any significant improvement.
Back home interest rates are at record lows (hardly a sign of a strong economy), and now the spectre of deflation suggests that people are simply prepared to hold off on the next big purchase with the prevailing sentiment being that prices will fall further.
The housing sector is cooling with those individuals who mortgaged themselves to the hilt in a low interest rate environment now perfectly positioned to suffer financial ruin when interest rates inevitably rise again.
When this transpires we will see (once again) scores of people with negative equity in their homes forced to service mortgages they can’t afford for a property that’s diminishing in value. And the entire Ponzi scheme has been promoted, aided and abetted by the banks, govts, real estate agents and property developers who all profit from keeping real estate values high.
When it does transpire, and it’s only a matter of time, the shit is really going to hit the fan.