Research Zeitgeist: Bank Capitalization Concerns Heat Up
Concerns about bank capitalization came to the fore this week, most notably in the form of worries about Lehman Brothers. The investment bank is clearly not out of the woods, but at least has a few advantages that Bear Stearns did not.
Fears of a meltdown of the overall financial system have all but evaporated (for now) since the Federal Reserve-led rescue of Bear. And the Fed’s decision to open the discount window to investment banks, at least until September, gives Lehman some breathing room to get its house in order. In addition there seems to be more confidence that Lehman’s management can find a way through the storm than there was for Bear.
But concerns over bank capitalization remain. Moody’s warned this week that some big US banks remain undercapitalized, while the Institute of Institutional Finance notes that European banks are lagging their US counterparts in shoring up their balance sheets following subrime losses. The Financial Times reports that of the $387 billion in credit losses that global banks have reported since the start of 2007, $200 billion was suffered by European groups and $166 billion by US banks, according to the IIF. However, the data also show that European institutions have raised only $125.5 billion of capital to compensate for the losses compared with nearly $141 billion raised by their US rivals.
This discrepancy is likely to make investors scrutinise the balance sheet position of European institutions as it implies that European banks will either need to raise more capital or cut their lending.
Though banks seem to be working their way through their subprime losses, another potential iceberg may be lurking in the form of Alt-A loans. Fitch Research this week added more credence to concercns over these “not quite ready for prime” loans, noting that many Alt-A borrowers are looking more like subprime borrowers.
In the you-can’t-fool-the-market-for-long department, monoline bond insurers MBIA and Ambac were finally downgraded this week and…nothing much happened, as it clearly was already factored into the companies’ stock prices.
The stagflation conundrum also is rampant with concern over rising inflation worldwide set against weak growth and employment numbers in the US and elsewhere.
With Barack Obama finally anointed the Democratic Presidential nominee, the focus now switches to what he and John McCain plan to do about the thorny economic challenges.
Research Recap Quote of the Week
In Moody’s view, there are still (U.S. financial) institutions where capital levels may be insufficient considering their risk profiles.
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