Since the crisis of 2007-2008, and under the very strong pressure of the regulators and the markets, the banking groups of the planet have on average doubled their maturities of capital: as many dampers intended to absorb possible economic shocks and not not live a new financial trauma. However, according to a recent study by Oxford Economics, this success in regulation is only partial. An example of this is the current rising numbers in US or falling in Italy, which are both sides of coin of the economical shocks.
A more crude indicator
The “solvency ratio”, the usual criterion used to verify that a bank is sufficiently capitalized is ” rather unpredictable ” to anticipate a bank failure. Firstly because this ratio allows banks to modulate the amount of equity depending on the type of asset present on their balance sheet: this gives “play” to banks, say the authors of the study. More in the American tradition, the latter prefer a more crude indicator, but less easy to handle: the leverage ratio (which measures the capital of the bank compared to the total assets of the bank, regardless of their level of risk, Editor’s note ). The image becomes less flattering since some banks only hold 3 or 4 dollars of capital for 100 euros of assets (against 12 to 18 dollars for the solvency ratio). Above all, the study recalls, the strengthening of bank balance sheets is partly illusory because it “coincided in some countries with a rapid rise in bad debts” .
The banks would still suffer from the aftermath of a ten-year crisis! But it is especially the next crisis that Oxford Economics would like to anticipate. For the institute, the low interest rate environment put in place by central banks to support the economy risks pushing banks into new difficulties, which are still difficult to assess. On the one hand, low interest rates encourage some banks to extend the length of time they lend, and shorten the length of time they borrow. Lending on 20 or 25 years – if the risk is controlled – allows the bank to capture an additional remuneration, long-term loans being more expensive for the borrower. On the side of refinancing, the bank is of course tempted to go for very short duration, “But these banks would be in danger if short-term funding costs were to rise, ” warns the study. Theoretically, liquidity ratios (banks that need to have enough liquidity to support a liquidity crisis) have been designed to limit the occurrence of such a risk.
Non-banking finance
In a more traditional way the study underlines that the banking regulation pushed to the development of the shadow banking, a sector of the finance which is not dangerous as such, but that the financial gendarmes seek to understand better and map. In particular “the connections between non-bank finance and banks” may be likely to spread a non-banking crisis towards traditional finance.
