Global Financial Markets The year 2007 and 2008 has seen an
them. Bank stocks in the developed economies continued their slow progress from the nadir but were unable
unprecedented contraction in the global money market as counterparty risk increased tremendously and the LIBOROIS spread reached new heights. However, the sustained efforts of the Governments
to completely recover their losses. The opposite was true, however, for bank stocks in the emerging countries, which almost came back to the pre-crisis level as a result of strong balance sheets and
and Central banks around the world helped the money market to settle down in 2010. Nasty surprises still lay in store though as the sovereign debt crisis in Europe again put the money market under renewed
better growth prospects.
stress in the middle of 2010. The sovereign debt crisis posed one of the strongest challenges to the global financial industry during the year. Governments all
financial crisis. Initially aided and abetted by the policy measures of the Government, it began to recover on its own as the liquidity and market risks eased at the end of 2009. However, a large
over the world and especially those in the fringes of Europe, struggled to recover from the financial crisis and huge Government stimuli after years of overspending, low taxation and massive
chunk of the global credit demand is still coming from Governments and other sovereign entities while private credit market continue to remain stagnant. The corporate bond spread also eased a little
welfare schemes. The fiscal deficit and external debt as percentage of GDP increased by leaps and bounds and the sovereign credit spreads followed in their wake. The tipping point came in the end
during the year even as the recovery was affected by the sovereign debt crisis of Europe.
Similar trend was observed for credit market which continued its tedious progress from the freezing over during the
of April 2010 when Standard and Poor’s downgraded the Greek bonds to ‘junk’ status and at the same time also lowered the ratings of the Spanish and Portuguese bonds. The EU had to stitch together a bail-out package for Greece and the Greek Government had to undertake painful cost cutting measures. This was followed by a period of relative calm until history was repeated again, this time with
Fig: Gross NPA as percentage of total loans in banks Banks in the emerging economies, which constitute 25% of global banking market, recovered quickly from the financial crisis. Their business model, which is to act predominantly as gatherers of savers as opposed to aggressive lenders like the western banks, thrived in the economic conditions with rise in domestic savings and easy monetary policies. Banks in China have seen a period of boom in the year 2009, lending twice as much in 2009 than in 2008.
Fig: Growth Percentage in Credit Markets
Ireland. However, the biggest worry still remained in Spain which had much bigger economy than Greece, Portugal or Ireland and a failure which can throw the global economy into disarray. As the year came to
Key Trends in Performance of Banks As a general rule in the developed economies, income of banks rose during the year although major part of the same came from trading fees, foreign exchange
a close, the last word had not yet been spoken on the European debt crisis. Equity markets across the world moved in tandem and continued their recovery from
gains, etc. Rising equity markets eased the pressure on banks and helped them become profitable by providing them with alternative profit sources. Better primary markets also allowed a lot of banks to
the rock bottom of early 2009. However, the sovereign debt crisis and sluggish recovery in the advanced economies again weakened the equity market in the developed economies. Emerging
s u b s t i t u t e c a p i t a l f ro m t h e s a m e . Regulatory capital as percentage of riskweighted assets thus increased for banks across geographies. The problem of loan losses and write downs continued,
economies, however, had an altogether different story to tell and the US Fed policy to keep interest rates at a historic low level opened up huge foreign investment in
however, as the percentage of nonperforming assets kept increasing.
14 The Senior Analyst
Fig: Change in Return of Equity of Banks Across Regions
The Challenges Ahead Looking forward to the days ahead, some of the biggest challenges of the banks over the world would to be to meet increasing capital requirements, address the issue of rising delinquencies, recover from the withdrawal of liberal monetary and fiscal policies, redressing balance sheet weaknesses and dealing with a weak credit market. The biggest market risk may come sometime in 2011 when the big spending European nations as well as USA will have to roll over their sovereign bonds and the subsequent pressure on the primary bond market may throw it into haywire. How banks cope with these challenges may very well determine their role in the new world economy.
-Sayan Majumder & Shifa Shalini Tirkey(XLRI)