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Alasdair Macleod: Banking crisis prompts the great unwind
By Alasdair Macleod
Thursday, October 13, 2022
There is a growing feeling in markets that a financial crisis of some sort is now on the cards. Credit Suisse's very public struggle to refinance itself is proving to be a wake-up call for markets, alerting investors to the parlous state of global banking.
This article identifies the principal elements leading us into a global financial crisis. Behind it all is the threat from a new trend of rising interest rates, and the natural desire of commercial banks everywhere to reduce their exposure to falling financial asset values both on their balance sheets and held as loan collateral. And there are specific problems areas, which we can identify.
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The phenomenal growth of over-the-counter derivatives and regulated futures has been against a background of generally declining interest rates since the mid-1980s. That trend is now reversing, so we must expect the $600 trillion of global OTC derivatives and a further $100 trillion of futures to contract as banks reduce their derivative exposure.
In the last two weeks, we have seen the consequences for the gilt market in London, warning us of other problem areas to come.
Commercial banks are overleveraged, with notable weak spots in the eurozone, Japan, and the UK. It will be something of a miracle if banks in these jurisdictions manage to survive contracting bank credit and derivative blow-ups. If they are not prevented, even the better-capitalized American banks might not be safe.
Central banks are mandated to rescue the financial system in troubled times. However, we find that the European Central Bankand its entire euro system of national central banks, the Bank of Japan, and the U.S. Fed are all deeply in negative equity and in no condition to underwrite the financial system in this rising interest rate environment. ...
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