Financial Health of Global Banks

Banks teetering again?

As 2016 began with a global sell off in stocks and oil, banks have come into limelight. The international financial system is once again in crisis and the banking system is facing the possibility of collapse, just as it did in 2008,according to Peter Osborne (no relation of the Chancellor) of the Daily Mail.

Japan's banks have lost more than a third of their value this year,while European banks are said to be down around 30% and UK banks somewhere in the region of 25%. 

What does this mean to the economies of the developed world.? 

Recent stock market sell off can be construed in two ways. It is either a financial catastrophe,or an epic buying opportunity? 

When markets fall and banks teeter,other financial assets are enjoying strong gains. Gold appears to become the best performing investment. After having fallen for the last four years from its peak above $1800, gold is coming to its own at $1200 an ounce recently.

Markets have become jittery as investors worry about a litany of issues from China's economic slowdown to the plunge in oil prices, banks' finances,and potential recession in emerging markets.

Role of banks

The health of banks are at the forefront of investor concern. 

The vital step of ordering banks to split apart their investment and retail arms, was called after 2008 crisis by the Bank of England.  

From 2019, Britain's biggest high street banks, that is those with more than £25 billion deposits have to run their retail banking operations as independent banks,almost entirely separate from their investment banking and overseas operations. 

The regulating bodies, however, did also request banks to have reserves for any eventuality.This has enabled banks to build up large sums in capital holdings as buffer for economic security.This has put a damper on lending.

Banks capital and bank's liquidity position are concepts that are central to the understanding what banks do, the risks they take and how best those risks should be mitigated.

It can be misleading to think of capital set aside by banks as an asset.It is a form of funding to absorb losses that could, if unchecked,threaten solvency.

In this regard, the Financial Policy Committee of the Bank of England was given legal powers and responsibilities to identify and take action to reduce risk to the financial system as a whole. 

Other safeguards on banks

There is a cap on bonuses to bankers' senior staff. However,this cap is not hurting as average salaries have jumped from £364,000 in 2013 to £702,000 in 2014. 

Further, competition among high street banks in UK was encouraged.Challenger banks were floated.Noteworthy among them was Metro Bank which was to be a user friendly,all hours open bank. TSB was weaned off Lloyds Bank which cut itself off from investment banking and concentrated on private banking operations.

Over banking

The claim was made that these initiatives would create over banking with the public being not too enthusiastic about using banking facilities.Every attempt was made to discourage the use of private banking for some unknown reason. The Government put a damper on encouraging bank deposits,by only guaranteeing £75,000 instead of the earlier £85,000.

Banks on their own too curtailed operations and retrenched staff in large numbers.They discouraged the use of Bank deposit safes' service. 

Besides, low overall cash inflows, with disappointing sets of financial results,plus hefty legal bills, have dragged banks profits down, below expectations. Litigation provision almost four times the level markets had expected and priced in, were seen in some French big banks, in recent days.

The last  Governor of the Bank of England (2003-2013), Mervyn King, now Lord King now states:"only a fundamental rethink of how we as a society organise our system of money and banking will prevent a repetition of the case that we experienced in 2008".

Investor confidence 

Investor confidence is at an all time low. But investor appetite will no doubt return. after correction in markets, Confidence will grow as banks " right size" either investment banking or take other measures.

Equity or debt? What is the most effective way to fund confidence? Taking any business to its next stage can be daunting. It requires confidence,capability and capital.

While ECB, the Bank of England and the Federal Reserve plots a round of economic stimulus measures,Banks on their own will want to be in the business of lending,which they know best. 

Early stage companies are less likely to be able to find loans,as they do not have the necessary track record as bank lending to companies with relatively stable cash flows.

Slowly, but surely, as banks start to lend again,confidence will be regained.