Unseen risks in the banking sector

Daniel Want

Prerequisite Capital Management

The relative fortunes of banks in different parts of the world have been increasingly indicative of underlying trends in currency markets. The question is, however, is this a coincidence or should we be viewing it as a signal?  

One way of looking at the above and following charts is as to see them as a way of glimpsing the ‘relative confidence’ trends that have been unfolding in the world over the last 10 years. 

Presently they are painting a picture that the capital markets largely are maintaining confidence in the US Dollar relative to most other major currencies.

Europe’s Banking Dysfunction Worsens

Christopher Whalen (Institutional Risk Analyst), 1st Aug 2017

“Investors who think that Europe is close to adopting an effective approach to dealing with failing banks may want to think again... While some Wall Street analysts are encouraging investors to jump into EU bank stocks, the fact is that there remains nearly €1 trillion in bad loans within the European banking system.  This represents 6.7% of the EU economy, according to a report and action plan considered by EU finance ministers earlier this month.  That compares with non-performing loans (NPL) ratios in the US and Japan of 1.7 percent and 1.6 percent of gross domestic product, respectively.

The Europeans appear to be playing a very dangerous game.  On the one hand, EU officials talk publicly about getting tough on insolvent banks and even suspending access to funds for retail depositors.  On the other hand, EU governments are continuing to bail out banks and large creditors in a display of cronyism and business as usual.”

Our analysis leads us to the contention that such trends are not so much ‘coincidence’ but are in fact more likely to be a signal of what is to come.

Given conditions that are unfolding in the world, and in particular, the largely unappreciated latent risks that are building within the globalised banking system, we do not believe it is a coincidence that the US Treasury Bond Yield has become increasingly correlated to the relative fortunes of the banking sector...

Written and contributed exclusively for Livewire by Daniel Want. 

Daniel Want
CIO & Co-founder
Prerequisite Capital Management

Daniel oversees the research, consulting and investment management activities of Prerequisite Capital Management (www.prerequisite.com.au).

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