Banking crisis — the Great Unwind
There is a growing feeling in markets that a financial crisis of some sort is now on the cards. Credit Suisse’s very public struggles to refinance itself is proving to be a wake-up call for markets, alerting investors to the parlous state of global banking.
This article identifies the principal elements leading us into a global financial crisis. Behind it all is the threat from a new trend of rising interest rates, and the natural desire of commercial banks everywhere to reduce their exposure to falling financial asset values both on their balance sheets and held as loan collateral. And there are specific problems areas, which we can identify:
- It should be noted that the phenomenal growth of OTC derivatives and regulated futures has been against a background of generally declining interest rates since the mid-eighties. That trend is now reversing, so we must expect the $600 trillion of global OTC derivatives and a further $100 trillion of futures to contract as banks reduce their derivative exposure. In the last two weeks, we have seen the consequences for the gilt market in London, warning us of other problem areas to come.
- Commercial banks are over-leveraged, with notable weak spots in the Eurozone, Japan, and the UK. It will be something of a miracle if banks in these jurisdictions manage to survive contracting bank credit and derivative blow-ups. If they are not prevented, even the better capitalised American banks might not be safe.
- Central banks are mandated to rescue the financial system in troubled times. However, we find that the ECB and its entire euro system of national central banks, the Bank of Japan, and the US Fed are all deeply in negative equity and in no condition to underwrite the financial system in this rising interest rate environment.
The Credit Suisse wake-up call
In the last fortnight, it has become obvious that Credit Suisse, one of Switzerland’s two major banking institutions, faces a radical restructuring. That’s probably a polite way of saying the bank needs rescuing.
In the hierarchy of Swiss banking, Credit Suisse used to be regarded as very conservative. The tables have now turned. Banks make bad decisions, and these can afflict any bank. Credit Suisse has perhaps been a little unfortunate, with the blow-up of Archegos, and Greensill Capital being very public errors. But surely the most egregious sin from a reputational point of view was a spying scandal, where the bank spied on its own employees. All the regulatory fines, universally regarded as a cost of business by bank executives, were weathered. But it was the spying scandal which forced the bank’s highly regarded CEO, Tidjane Thiam, to resign.
We must wish Credit Suisse’s hapless employees well in a period of high uncertainty for them. But this bank, one of thirty global systemically important banks (G-SIBs) is not alone in its difficulties. The only G-SIBs whose share capitalisation is greater than their balance sheet equity are North American: the two major Canadian banks, Morgan Stanley, and JPMorgan. The full list is shown in Table 1 below, ranked by price to book in the second to last column. [The French Bank, Groupe BPCE’s shares are unlisted so omitted from the table]
The IMF has warned of an increased risk of rapid, disorderly repricing in financial markets, which is exacerbated by existing vulnerabilities and a lack of liquidity.
— unusual_whales (@unusual_whales) October 16, 2022
JUST IN – China delays the release of major economic data for the third quarter, without giving a reason or a new date.
— Disclose.tv (@disclosetv) October 17, 2022
This won’t end well pic.twitter.com/IYuQ5A896w
— 🅰🅻🅴🆂🆂🅸🅾 (@AlessioUrban) October 16, 2022
Most of you have no idea what’s coming.
And it’s not pretty.— Carol Roth (@caroljsroth) October 16, 2022
Satyajit Das: The Financial Party Is Coming to an Abrupt End
ICYMI – Norinchukin Bank, one of the biggest buyers of CLOs in recent years – has stopped buying new deals in the US and Europe.t.co/FB1vP5CV8C pic.twitter.com/dmFsN393RV
— Tracy Alloway (@tracyalloway) October 17, 2022
A historic Bubble is still unwinding.
This is why Put spikes did NOT mark bottoms this year – despite many hoping for one.
Meanwhile, Trillions in passive Equity assets could still be sold – as capitulation rolls in.
Bear Markets bottom on liquidation.
This isn't even close. pic.twitter.com/VMQInCHV5S
— Macro Charts (@MacroCharts) October 17, 2022
Just remember that the QT will either do the FED or the market. If the FED pivots inflation expectations will bounce so nominal rates too. Everyone used to remember 2020 QE, rates have begun to rise since then. Interest rates won't collapse.
— 🅰🅻🅴🆂🆂🅸🅾 (@AlessioUrban) October 17, 2022
The system will implode there is no way wages can rise and margins increase again.. that's the endgame
Result extreme poverty
— 🅰🅻🅴🆂🆂🅸🅾 (@AlessioUrban) October 17, 2022
First quarter of 2023 may go down as one of the worst ever for the equity markets. We are heading for a disaster. The real sell-off is still to come although I still expect some midterm election manipulation, but after that the Fed will be powerless to stop the carnage.
— HOZ (@MFHoz) October 14, 2022
Another overnight futures rally to fade:t.co/vcc4e8LNV6
“Since the bear market rally in mid-August, the balance of Demand and Supply materially weakened, Lowry, the nation’s oldest technical analysis service, wrote to clients over the weekend" pic.twitter.com/ZuEhksBmxq— Mac10 (@SuburbanDrone) October 17, 2022