Latest news with #Basel3
New Indian Express
20-05-2025
- Business
- New Indian Express
The march towards the next global economic crisis has begun and you must fear its coming
Lending by regulated entities to the shadow banking sector is greater than $2 trillion globally ($1.2 trillion by US banks alone). Lending to hedge funds, private equity, private credit, and buy-now-pay-later companies is one of the fastest-growing parts of the banking system. Hedge funds currently manage around $4.5 trillion, up from $2.8 trillion in 2008. They have recovered from the significant fall in assets under management after the 2008 crisis and have grown by almost 56 percent since 2015. Global bank equity is around $6-7 trillion. Banks are leveraged around 8 to 10 times. Large losses would place some banks at risk of insolvency and threaten financial stability. There are existing losses. Bank that purchased often long-dated bonds with excess liquidity, which outstripped loan demand, suffered markdowns from rising interest rates when inflation rose sharply in 2022. The failure of Silicon Valley Bank was related to these problems. US banks currently have around $500 billion in unrealised losses, representing 50 percent of their Common Equity Tier One Capital. Global losses are 3 to 4 times that. Liquidation of these holdings would crystallise these write-offs, reducing bank capital. Following the 2008 financial crisis, regulators introduced stricter bank regulations. Known as Basel 3, they are still not fully implemented, with the industry seeking to weaken them. Their effectiveness also remains untested. If hybrid securities and bail-in securities do not work as intended then the capital available to absorb losses will be lower. In any event, the crucial factor in banks surviving large credit losses is liquidity. Banks operate with a fundamental mismatch using short-term deposits to fund longer-duration assets. Rising credit losses may lead depositors, both retail and wholesale, to withdraw funds or limit exposures triggering a familiar bank run, especially where the levels of deposit insurance are low. Regulations to improve bank liquidity reserves have not been tested by a real crisis, and their efficacy remains unclear. The shadow banking system (non-banks including institutional investors, public and private funds, securitisation vehicles, family offices and HNWIs) is now a significant supplier of capital. However, the real equity and liquidity reserves ultimately supporting these investments are not transparent. Fund losses will directly flow through to institutional and retail investors. Some, like insurers and pension funds, are contractually obliged to pay out on their obligations. Others, if leveraged, may have to sell assets for liquidity to cover losses. Problems in private credit markets will affect banks that have a significant exposure through their lending to non-bank financial institutions. The favoured strategy of 'originating', not 'holding' assets, means that a disruption in private credit will leave banks with warehoused loans intended for on-sale. This will affect prices, exacerbating markdowns. The financial system now entails complex chains of risk with legal and financial rights or obligations, enforceability, and claim priorities uncertain. Transactions routinely involve multiple investors and lenders, sometimes managed by the same asset manager. One fund may hold equity interests while a related entity may be the primary creditor. Investors frequently collaborate in large transactions. Complex capital structures and competing claims will create conflicts of interest despite much-touted Chinese walls. Litigation and lower recovery rates may result in higher than expected losses. Actual losses or markdowns, because of lower prices, will result in a contraction of credit. This will exacerbate any economic slowdown given the model of debt-funded consumption and investment. The diminished supply of capital will place pressure on cash-strapped firms. It will also affect the value of existing start-ups, many of which do not have sufficient liquidity to reach the operational stage and need follow-on funding. The process is one of downward spiralling feedback loops. Losses lead to lower leverage and lower credit availability, which leads to economic retrenchment setting off a new round. As markets become increasingly illiquid, struggling to handle the selling and worsening conditions, the crisis will intensify. Resilience and Resolve A system weakened over time lacks the resilience and capacity to respond to a new crisis. The ability to absorb shocks is limited by low growth, much of its driven by government deficits and debt, and high prices. Businesses have not fully recovered from the pandemic. With disposable income reduced by wages lagging inflation and excess savings from the Covid-19 period largely exhausted, individuals are struggling. 59 percent of US consumers would need to borrow or sell assets to cover an unexpected $1,000 emergency expense. The wealthy have gained from rising asset these are phantom profits based on volatile market values. It is not cash in hand as the gains are unrealised. Investors are reluctant to sell because of fear of missing out on further appreciation. Many investors have taken out additional borrowings against these assets to fund spending. 50 percent of all US consumer spending now comes from the top 10 percent of income earners. The linkage between share and real-estate values and expenditure means that consumption expenditure may be less reliable than in previous downturns. Any new crisis will be global as the principal drivers affect all economies. The impact of restrictions on trade and capital movements, one of the key factors in the expected downturn, is especially pervasive. The first-order effects of trade wars will be particularly damaging for Europe, China and Canada. Second-order effects from a decelerating global economy will be larger and more widespread. Emerging markets, which have been under persistent stress, face problems. Those directly reliant on US trade, like Mexico, face major slowdowns. Asian, Latin American and African economies, integrated into Chinese supply chains, will be affected by the cage fight between the two great powers for supremacy. Lower commodity prices, as a result of slower demand, will affect raw materials producers. Remittances, the lifeblood of many emerging nations, will decline. Poorer countries, lower on the value chain and with limited ability to adjust, will be badly affected. Familiar vulnerabilities such as reliance on foreign investment, high debt, spendthrift policies, crony capitalism, corruption, dysfunctional rule and poor governance will be exposed. Crises result in large loss of wealth. The US economy alone lost over $20 trillion in the 2008 financial crisis, although the number is disputed. There is the additional cost of support. In 2008, the US government committed around $ 2 trillion in interventions, bailouts and economic stimulus packages. The US Federal Reserve committed around $7.8 trillion in lending and asset purchases. Eurozone governments expended € 1.5 trillion in capital support and €3.7 trillion in liquidity support for the financial system. While some of the money was later recovered from sales of acquired assets and institutions, authorities still need to be in a position to make the required initial commitment. Governments and central banks' ability to provide support is lower than in previous crisis. Chronic budget deficits, high public debt levels and the rising interest cost limit any new intervention.
Yahoo
22-04-2025
- Business
- Yahoo
IMF warns Trump tariffs are putting global financial system under strain
The global financial system is coming under increasing strain as Donald Trump's trade war rocks markets, the International Monetary Fund has warned. 'Global financial stability risks have increased significantly,' the IMF said in its regular snapshot of the system, urging regulators to be on the alert for potential crises. It pointed to the 'sharp repricing of risk assets', that has followed the US president's tariff announcements since February – in particular his 2 April 'liberation day' statement – and warned that there may be more to come. Related: Labour must focus on risk to global financial stability posed by Trump policies, not only trade | Heather Stewart Published as finance ministers and central bankers gather in Washington for the IMF's spring meetings – and as it downgraded its forecasts for global growth amid tariff concerns – the Global Financial Stability Review identified what it called 'forward-looking vulnerabilities' in markets. These include what it said were overstretched valuations for stocks and bonds in some areas, even after recent sell-offs; the highly leveraged state of some financial institutions, including hedge funds; and the vulnerability of some governments to volatility in sovereign bond markets. Governments in emerging economies could be hit especially hard by sudden increases in borrowing costs, the IMF warned, suggesting 'investor concerns about public debt sustainability and other fragilities in the financial sector can worsen in a mutually reinforcing fashion'. Meanwhile, companies may find it more expensive to borrow, if volatile corporate bond markets drive up the cost of debt, it suggested – while households will be hit via 'wealth effects', if the value of their pensions and other investments continues to slide. The Washington-based lender expressed particular concern about the growing role of 'nonbank' lenders, which are much less heavily regulated than banks, but can still pose risks to the wider financial system. The role of these lenders, which include pension and investment funds, has grown rapidly in recent years, after rules on banks were toughened up after the 2008 global financial crisis. The IMF warned of a 'deepening nexus' between these nonbank lenders and traditional banks. It suggested they could be forced to divulge more information to regulators, which could then identify and rein in 'poorly governed and excessive risk-taking institutions'. The IMF also urged governments to ensure there is sufficient capital and liquidity in the banking system to cope with a crisis – including by the 'full, timely and consistent implementation' of the so-called Basel 3 rules, devised after the 2008 crisis. The Bank of England recently delayed the implementation of the final stage of these rules, known as Basel 3.1, by a year in the UK, as the chancellor, Rachel Reeves, pressed regulators to take a more pro-growth approach. Separately on Tuesday, a policymaker at the Bank, Megan Greene, said US trade tariffs were more likely to push down UK inflation than to drive it up, but that there were risks on both sides. Greene told Bloomberg: 'The tariffs represent more of a disinflationary risk than an inflationary risk.' However, she added: 'There's a tonne of uncertainty around this, but there are both inflationary and disinflationary forces.' On Monday, Trump renewed his attack against the Federal Reserve chair, Jerome Powell, and the independence of the US central bank. Greene said that 'credibility is the currency of central banks and I think independence is quite an important piece of that'. She said the Bank could credibly try to hit its targets because it was free to make its own decisions.
The Guardian
22-04-2025
- Business
- The Guardian
IMF warns Trump tariffs are putting global financial system under strain
The global financial system is coming under increasing strain as Donald Trump's trade war rocks markets, the International Monetary Fund has warned. 'Global financial stability risks have increased significantly,' the IMF said in its regular snapshot of the system, urging regulators to be on the alert for potential crises. It pointed to the 'sharp repricing of risk assets', that has followed the US president's tariff announcements since February – in particular his 2 April 'liberation day' statement – and warned that there may be more to come. Published as finance ministers and central bankers gather in Washington for the IMF's spring meetings – and as it downgraded its forecasts for global growth amid tariff concerns – the Global Financial Stability Review identified what it called 'forward-looking vulnerabilities' in markets. These include what it said were overstretched valuations for stocks and bonds in some areas, even after recent sell-offs; the highly leveraged state of some financial institutions, including hedge funds; and the vulnerability of some governments to volatility in sovereign bond markets. Governments in emerging economies could be hit especially hard by sudden increases in borrowing costs, the IMF warned, suggesting 'investor concerns about public debt sustainability and other fragilities in the financial sector can worsen in a mutually reinforcing fashion'. Meanwhile, companies may find it more expensive to borrow, if volatile corporate bond markets drive up the cost of debt, it suggested – while households will be hit via 'wealth effects', if the value of their pensions and other investments continues to slide. The Washington-based lender expressed particular concern about the growing role of 'nonbank' lenders, which are much less heavily regulated than banks, but can still pose risks to the wider financial system. The role of these lenders, which include pension and investment funds, has grown rapidly in recent years, after rules on banks were toughened up after the 2008 global financial crisis. The IMF warned of a 'deepening nexus' between these nonbank lenders and traditional banks. It suggested they could be forced to divulge more information to regulators, which could then identify and rein in 'poorly governed and excessive risk-taking institutions'. The IMF also urged governments to ensure there is sufficient capital and liquidity in the banking system to cope with a crisis – including by the 'full, timely and consistent implementation' of the so-called Basel 3 rules, devised after the 2008 crisis. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion The Bank of England recently delayed the implementation of the final stage of these rules, known as Basel 3.1, by a year in the UK, as the chancellor, Rachel Reeves, pressed regulators to take a more pro-growth approach. Separately on Tuesday, a policymaker at the Bank, Megan Greene, said US trade tariffs were more likely to push down UK inflation than to drive it up, but that there were risks on both sides. Greene told Bloomberg: 'The tariffs represent more of a disinflationary risk than an inflationary risk.' However, she added: 'There's a tonne of uncertainty around this, but there are both inflationary and disinflationary forces.' On Monday, Trump renewed his attack against the Federal Reserve chair, Jerome Powell, and the independence of the US central bank. Greene said that 'credibility is the currency of central banks and I think independence is quite an important piece of that'. She said the Bank could credibly try to hit its targets because it was free to make its own decisions.
Yahoo
08-02-2025
- Business
- Yahoo
Vontobel Holding AG (XSWX:VONN) (Q4 2024) Earnings Call Highlights: Record Profit Growth and ...
Release Date: February 07, 2025 For the complete transcript of the earnings call, please refer to the full earnings call transcript. Vontobel Holding AG (XSWX:VONN) reported a 32% increase in profit before taxes, reaching CHF 354 million, marking one of the best financial results in its history. The company returned to positive net new money growth, with revenues increasing in both private and institutional client segments. Vontobel Holding AG maintained a solid capital position with a CT1 ratio of 16.1%, well above the 12% target, allowing for an unchanged dividend proposal of CHF 3 per share. Significant strategic progress was made, including two acquisitions that align with the company's strategy to enter private markets and strengthen its position with high net worth clients. The efficiency program is on track, achieving exit rate savings of CHF 45 million, contributing to a cost-to-income ratio improvement to below 75%. The company faced foreign exchange effects that resulted in a profit reduction of CHF 40 million due to a stronger CHF against the US dollar. Institutional clients experienced outflows, particularly in emerging market strategies, which continue to face challenges. The tax rate increased due to global minimum tax regulations and reduced participation exemptions, impacting profitability. Interest income decreased by 36% due to reductions in Swiss interest rates and shifts in deposit mix, impacting overall revenue. Despite improvements, the company still faces challenges in emerging markets, which remain unpopular among investors, affecting inflows. Warning! GuruFocus has detected 4 Warning Signs with BOM:500238. Q: Can you discuss potential mitigation measures for the CT1 ratio impact from Basel 3 final measures and the outlook for institutional clients in 2025? A: The CT1 ratio impact from Basel 3 is roughly 1% points. We've already implemented mitigation measures, which increased risk-weighted assets by 50 million under the old regime but will decrease them by a billion under the new regime. For institutional clients, we expect continued momentum in fixed income, with emerging markets showing early signs of interest, particularly in fixed income rather than equity. We are well-positioned to capture these flows with our strong investment teams. - Respondent: Unidentified_4 and Unidentified_3 Q: Can you explain the technical effect supporting your fee margin in asset management, and provide an outlook on achieving the 4-6% growth target in 2025? A: The margin in asset management was 37 basis points, with some year-end one-offs increasing it slightly. We are confident in achieving the 4-6% growth target, with strong interest in fixed income, asset-backed securities, and emerging market fixed income. Our strategic positioning and engagement in equity strategies also support this outlook. - Respondent: Unidentified_3 and Unidentified_4 Q: What is the expected tax rate for 2025 and beyond, and how has the structured solutions business performed? A: We expect a tax rate of around 22-23% in 2025, returning to 20% in the longer term. The structured solutions business performed well, driven by higher client activity and market volatility. We gained market share as some competitors retrenched, and the fourth quarter was particularly strong due to US elections and crypto volatility. - Respondent: Unidentified_4 and Unidentified_2 Q: Are you experiencing increased margin pressures in the structured products business? A: No, we haven't experienced increased margin pressures in structured products, and this is reflected in our results. - Respondent: Unidentified_2 Q: Can you elaborate on the measures taken to improve risk weightings under Basel 3 final, particularly in relation to structured solutions? A: We've adjusted product design and pricing to favor products with better risk-weighted asset profiles. We've also optimized our balance sheet holdings, favoring industry bonds over banking bonds. These measures were implemented early to align with Basel 3 final requirements, despite short-term disadvantages. - Respondent: Unidentified_4 For the complete transcript of the earnings call, please refer to the full earnings call transcript. This article first appeared on GuruFocus.
