2016, year of the zombie banks

Zombie bank might be the expression of the New Year. This term covers a financial institution which previously had a “healthy” operation, but because of a crisis it ran out of (accounting) capital. This happens when the bank must write down an amount from its assets, bigger than its equity. So, on paper, its own capital becomes zero, or even negative. Though with government credit support and capitalization, the bank can continue its operation, but in fact we talk about a bankrupt institution.

This phenomenon is not a novelty, after the global and then the euro crisis there was a real Halloween in the developed economies. But now it’s time in the emerging markets to have a carnival.

Significant number of the players on the emerging markets has been indebted in Dollars, by taking advantage of the “easy money” opportunities in the last few years. Since then from the point of view of emerging economies very important good-market indexes collapsed. This was followed by the foreign currencies and now comes the increase of interest rate and risk premium of Dollar. If we say that the situation is not all rosy, we expressed it very gently.

The emerging banking system has many weaknesses as well. The credit level reached a record high level, compared to the GDP. The proportion of nonperforming loans is increasing (except in China, but the credibility of those data is questionable), while the credit-deposit indicators are also in increase. Regarding the latter: if I have several times as much credit, as deposit; then a small fall down of my credits, can significantly influence the security of deposits. Usually the capital adequacy ratio is way smaller than those of the Western banks. So even with smaller credit fall downs, one bank can easily loose its capital.

The figures below show the above mentioned situation. The upper, left-hand side figure illustrates banks’ capital to asset ratio in BRIC countries (red) and in the world (blue). Up on the right-hand side we can see the proportion of nonperforming loans to risk-weighted assets of the banks. Left-hand side, down, we can see bank landing as percentage of GDP. Finally right-hand side, down is illustrated the bank’s customer deposits in certain regions as percentage of total loans. The smaller this ratio, the smaller is the amount for one unit of credit.
hitelre_1 hitelre_2

The American banks and Fed’s interest rate increase
Small by-pass to the American banking system: money printing made its effects, not only banks’ asset holdings have grown, but compared to these the proportion of the liquid assets grew by 150%. The dry up of the interbank credit market and the lack of liquidity had a significant role in the previous crisis. Looking at the actual numbers, this is not a threat at the moment; moreover, banks’ profitability can be increased by the interest increase, through higher short-term interest incomes.

Finally a personal idea: the 5 year inflation-indexed American bounds pay 0.5% interest annually. These yields became positive in 2015. Since the beginning of 2010 this happened only once, at the end of 2014, only for a few weeks. A whole generation of finance people grew up without experiencing real, risk-free returns on the market. Indeed, with the start of the interest increase, a new era begins, even if a lot of people, including myself, are skeptic about the durability of this path.

(With this idea I close my notes from this year. I wish to all kind Readers a Successful New Year.)!?

Original date of Hungarian publication:
 December 29, 2015