Have banks stopped trusting each other? That’s not issue according to Nigel Myer, credit analyst at Dresdner Kleinwort, who has dispatched an elegant (and slightly alarming) note on the matter to clients.
It has been widely reported that a lack of trust in the banking system is the reason for lower liquidity, but Myer begs to differ:
We don’t see it that way; it seems to us there is a buyers’ strike in large parts of the CP markets and with borrowers having to extend or rely on their backstop facilities banks have to contemplate committed undrawn lines becoming balance sheet assets. Also, underwriting pipelines, especially in the LBO-type arena, have become blocked; this adds further to the process of contingent assets become actual balance sheet holdings.
The Dresdner man believes we are watching “re-intermediation” - something that “may stretch capitalisation and reduce returns on assets.”
The ‘rule book’ of what is expected in banking markets has effectively been thrown away. But, participants are having to continue playing the game with little certainty about what the rules now are.
Years of enthusiastic disintermediation in banking means that risks and assets are broadly spread, Myer notes, but he warns that there is no experience of how the many new holders of risk will behave in a time of stress.
He concludes on this cheery note:
As banks balance sheets are forced to take on more assets, there is a real potential for capital stretch. Nothing to breach regulatory ratios, we think, but enough to be noticeable. Playing the game without a rulebook will be challenging as leverage looks for new sources of finance. The unwind of gearing will likely be painful and have costs.
