Sunday, September 18, 2016

Evans-Pritchard: Bank for International Settlements Flashes Red Alert for a Banking Crisis In China

Well that doesn't sound good.
We take the Bank for International Settlements very seriously, links below.

From The Telegraph:
China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog.

A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.

The Bank for International Settlements warned in its quarterly report that China’s "credit to GDP gap" has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia's speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring.  The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences.

It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line.

China’s total credit reached 255pc of GDP at the end of last year, a jump of 107 percentage points over eight years. This is an extremely high level for a developing economy and is still rising fast.

China's debt ratio has rocketed Credit: IIF
Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night.

The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift.

“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull,” said Claudio Borio, the BIS’s chief economist. “This explains the nagging question of whether market prices fully reflect the risks ahead.”

Bond yields in the major economies normally track the growth rate of nominal GDP, but they are now far lower. Roughly $10 trillion is trading at negative rates, and this has spread into corporate debt. This historical anomaly is underpinning richly-valued stock markets at time when profit growth has collapsed....MORE
Here's the BIS Quarterly Review, 18 Sept. 2016.

On June 26, 2007 (i.e. pre-"Quant-quake", pre-Bear Stearns, pre-ought-eight-near-catastrohe) we posted a short little piece:
"(Off-topic) Banks' banker warns of downturn":
THE risk of a 1930s-style economic slump has been heightened by "euphoric" markets tapping cheap global credit, one of the world's pre-eminent financial institutions has said.
In its annual report, the Bank for International Settlements noted that the conditions that led to the Great Depression of the 1930s and the Asian crises in the 1990s reflected the current environment.
From The Age
And then onJune 30, 2008
The Bank of International Settlements (BIS), the international body responsible for coordinating action among central banks, says the global economy is at the "tipping point" of a downturn that could be so severe that inflation concerns could melt away in the face of a deflationary spiral (WSJ)....
  • On September 7, 2008 Fannie Mae and Freddie Mac were placed into conservatorship.
  • On September 14, 2008 Merrill Lynch agreed to be acquired by Bank of America.
  • On September 15 Lehman filed their bankruptcy petition.
  • On September 16 AIG became a 79.9% subsidiary of the U.S. Treasury.
  • Within 10 more days the Nation's largest thrift, WaMu was seized and five days later Wachovia was gobbled up and we were off to the races.
Good times, good times.
It May Have Been October 2008 When I Lost My Mind