As Europe braces for the release of its bank stress tests on Friday, 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 percent. Before the 2009 global financial crisis, they stood at 4.2 percent.
If anything, the problem is starker now than then: There are more than $3 trillion in stressed loan assets worldwide, compared to the roughly $1 trillion of U.S. subprime loans that triggered the 2009 crisis. European banks are saddled with $1.3 trillion in non-performing loans, nearly $400 billion of them in Italy. The IMF estimates that risky loans in China also total $1.3 trillion, although private forecasts are higher. India’s stressed loans top $150 billion.
Once again, banks in the U.S., Canada, U.K., 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 $3 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 buildup 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.
by Satyajit Das, Bloomberg | Read more:
Image: none
If anything, the problem is starker now than then: There are more than $3 trillion in stressed loan assets worldwide, compared to the roughly $1 trillion of U.S. subprime loans that triggered the 2009 crisis. European banks are saddled with $1.3 trillion in non-performing loans, nearly $400 billion of them in Italy. The IMF estimates that risky loans in China also total $1.3 trillion, although private forecasts are higher. India’s stressed loans top $150 billion.
Once again, banks in the U.S., Canada, U.K., 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 $3 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 buildup 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.
by Satyajit Das, Bloomberg | Read more:
Image: none
