Stability in global banking: Part 1

By Maureen Aylward

With a financial crisis engulfing the Euro Zone and continued uncertainty in the US, we asked our Zintro experts if the global banking system is any safer three years after the financial crisis.

Paul Stheeman, a former director of international treasury, says that the global banking system can only become safer when banks realize a significant increase to their capital base. “So what has happened here in the last three years? Have banks taken appropriate measures to increase their capital? The answer to this has to be no,” Stheeman says. “It is not that banks have performed badly in the last three years. They have, however, used available funds for other purposes. It is in particular the weaker banks, which were supported by federal governments in 2008 and 2009 that recently have been more eager to repay state loans than to deal with poor capital. This may be an attractive short-term solution for them as they are able to regain their independence, but it has not reduced their vulnerability to turmoil in the financial markets.”

Mahmoud Zayed, a financial and business analyst, says that the global banking system is not safer. “After the crisis, we saw how complicated the relationships are between financial institutions across the world. These relationships have a roots that extend from blue chips to small and medium sized companies and reach governmental institutions,” he says. “Industries should know that they are the building blocks for the financial systems: from basic depositing and lending relationships to more structured and complicated relations. If industries are slow in growth or productivity, this will affect the financial system.”

Edward Sachs, an expert in banking relationships, says it is doubtful that global banking networks are safer since back-stops to European sovereign and domestic leveraged borrower debt are uncommitted. “Backstops to keep banks solvent are not particularly market driven; therefore, they may not take hold efficiently and effectively,” says Sachs. “Industries need to monitor credit lines for defaulting (weak bank) funding partners and examine agent bank relationships carefully. An agent bank could be rendered insolvent in a matter of days or weeks through sovereign debt losses, withdrawals of deposits, or overnight clearing deficiencies. European and American banks deserve watching as their asset quality is questionable and highly dependent on the state of global recovery and of real estate recovery.”

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