It seems extraordinary that, for all of the stress testing and recapitalising over the last 7 years since the collapse of Lehman Brothers, banks are once again in the eye of a new financial storm. A regularly repeated post-credit crunch mantra was that the solutions politicians and central bankers used to dig the global economy out of trouble were simply storing up problems for the future. Banks were bailed out by the taxpayer and thus lived to fight another day, but never really sorted themselves out - just as they were deemed too big to fail they have also proved too big to fix.
Italian banks look especially weak, with reports suggesting they're sitting on €350bn of bad debt - a whopping 17 per cent of their loan books. The EU has agreed a deal to backstop the sale of bad loans to private entities, to help them start lending again - but critics suggest that once again risk is being lumped on the taxpayer, and is a sign that the options available to stimulate growth are becoming more limited. That’s certainly the view increasingly held by observers of Japan’s attempts to pull itself out of stagnation, a struggle that European central bankers will note with some concern. Far from beneficiaries of central bank largesse, commercial banks are increasingly worried at the impact on profits of low and negative rates. And further rate rises in the US appear to have been put on the back burner after Fed chief Janet Yellen warned on Wednesday that the economic backdrop was now “less supportive of growth”.
Meanwhile the banks’ struggles suggest there is more to the view of the falling oil price as a symptom of global economic weakness than those espousing a simple demand/supply imbalance have been prepared to accept. In fact, the plunge in commodity prices could exacerbate an already fragile situation – US banks are significantly exposed to a falling oil price in the form of loans to shale producers, and bad debts are rising as the oil price slump renders them unable to service their loans. Some old hands are looking nervously back to the Texas banking crisis of the mid 1980s, when the ripple from a collapsing oil price destroyed the state’s banking industry.
Banks are, of course, more diversified these days. But we should still avoid complacency. If the credit crunch taught us one thing it is that banking crises are not easily contained.
