S&P Expects Profound Changes in Banking System
The series of events that have led to the shutting down of the credit markets and eroded confidence in the global financial system will lead to the most profound changes in the banking system since the Great Depression, according to Standard & Poor’s Ratings Services.
In a new report How The Credit-Market Crisis Is Changing The World Of Banking, S&P says the outlook for the global economy is worsening, and the changes resulting from these recent events are leading to a reassessment of the creditworthiness of financial institutions. “Despite the unprecedented government actions to bring order to the banking sector and to help stabilize capital markets, in Standard & Poor’s view, there will still be an impact on the real economy from the contraction in financing and asset price declines, which will likely cause more delinquencies and defaults on loans.”
As a result, an increased call for regulation and a wave of bank consolidations, as seriously weakened institutions are acquired by stronger ones, along with this newfound coordination of global regulatory and central banking initiatives, appear likely to significantly alter the nature of the financial services industry.
S&P believes several factors will combine to change the face of the banking industry:
- Increased regulation;
- Consolidation of weaker entities;
- Fundamental reconsideration of the “originate to distribute” model;
- Adaptation to higher volatility; and
- Higher losses for this economic cycle.
“It appears the level of losses for banks will be much greater,” said Standard & Poor’s credit analyst Tanya Azarchs. “Although governments have demonstrated a willingness to provide extraordinary support to a degree we have not previously seen, we now believe credit markets may be prone to bouts of illiquidity in the future. We are therefore reassessing the vulnerability of the wholesale-funded banking model and will conduct a global review of major mature market-financial institutions, which will consider all factors, including government support and deteriorating financial performance.”
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