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Banks still seen as risky five years after start of crisis

July 17, 2012

NEW YORK: Investors see big banks as riskier than before the first flames of the financial crisis
flared five years ago and probably always will, according to a new report from Moody’s Analytics, a sister company of the bond-rating agency.

Risk premiums for bank debt are “highly unlikely ever to return to their former levels, both in the US and Europe,” according to the report by a team led by David Munves.

For big US and European banks, the cost of credit default insurance, a measure of investor fear, is still nearly 20 times as high as it was in early July 2007 before the failure of two Bear Stearns hedge funds. The funds were filled with mortgage-related securities and funded largely with short-term
instruments.

Among the reasons cited for the persistent doubts among bank investors are steps governments are taking to make creditors bear more of the losses of future bank failures. For example, nine major banks were required to submit to US regulators on July 1 so-called “living wills” that map out steps to take to liquidate mortally wounded institutions and turn creditors’ claims into losses or stock.

Regulators and legislators are also discussing breaking up big banks to separate high-risk activities from guaranteed deposits, the report noted. That would remove another reason for governments to bail out banks and all of their creditors.

And since the start of the crisis, the transparency and accuracy of bank financial statements has been questioned following stress tests by regulators. In Europe, many banks had severe problems after passing initial tests. In the United States four failed tests of whether they were strong enough to carry out their capital plans.

JPMorgan’s sudden admission on May 10 that it had a badly-flawed portfolio of credit derivatives has revived doubts about the ability of big banks to control their risks, the report noted. That loss has ballooned to US$5.8 billion from the US$2 billion the company first reported.

The fear among investors, which is also evident in stock prices, continues to be high despite the fact that bank balance sheets and portfolios are generally better. Problem loans and charge-offs have been falling for all of the major US banks for two years, according to the report.

- Reuters


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