Capital Gold Group Report: New Financial Crisis May Be Brewing, Analysts Warn
by Joseph Schuman, Senior Correspondent
AOL News (June 14) -- Can you judge how close the global economy is to the brink of another financial crisis by measuring risk-taking in the markets?
Jacob Gyntelberg and Michael King, two researchers at the Bank of International Settlements (BIS), seem to think so. And they've found some alarming parallels between recent bank and investor behavior and the patterns preceding the global meltdowns that began in 2007.
The BIS is the so-called central bank of central banks, where the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and others come together to share information, policy ideas and economic research. It also acts as an agent or trustee to help international financial operations flow and a counterparty for transactions between central banks -- in other words, the world's lending facilitator of last resort.
In a commentary accompanying the latest quarterly BIS report on banking and market statistics called "Back to the Future," Gyntelberg and King compare the tumult of two and three years ago to the volatility of stock markets and credit markets in recent months as Europe grappled with renewed financial crises in Greece and elsewhere that threatened to spread across the Atlantic.
"The swift reversal in market confidence evokes painful memories of autumn 2008, when the collapse of Lehman Brothers brought money and capital markets to a virtual standstill," they write. "In both cases market sentiment deteriorated rapidly around a trigger event, with problems in one region spreading globally through the network of interbank funding markets and counterparty credit exposures."
To translate into nonfinancial language: After Lehman collapsed, investors around the world lost confidence in all banks with investment ties to Lehman -- which was many of the world's big institutions -- and panicked.
Market volatility surged, with share prices and indexes rising and falling in peaks and valleys, and investors fled from risky assets and put their money in safe havens like U.S. Treasury bonds.
Then, as recently, the Fed and other central banks quickly provided "exceptional" amounts of cash to banks in a bid to keep them lending, and governments announced rescue packages aimed at restoring market confidence and stabilizing the financial system.
But "while the broad outlines are similar, the Greek downgrade on 27 April and the subsequent market reaction may have more in common with the start of the subprime crisis in July 2007 than the collapse of Lehman Brothers in September 2008," Gyntelberg and King write.
The earlier crisis, a foreshock to the convulsions that led to recession, began when U.S. homeowners with subprime mortgages began to default and banks started disclosing the mounting losses they were taking on securities based on those mortgages. At the same time, credit rating agencies like Moody's began to wake up to how badly they had overrated these investments.
Suddenly, the cost of borrowed cash -- the lifeblood of any capitalist economy -- began to skyrocket. Banks were afraid to lend.
The differences between Libor, an international measurement of how much banks charge each other for dollar-denominated loans, and OIS, an industry amalgamation of rates for a kind of protective interbank loan transaction, were climbing. That meant banks weren't trusting other banks with their money and were charging higher interest rates for loans.
In particular, European banks faced increasing difficulties in getting their hands on U.S. dollars. And though stock prices kept rising, share prices became increasingly volatile.
What's scary is that this is exactly what economists have been observing over the spring.
The authors use graphs to show how a widely watched volatility index called VIX was following its July 2007 trajectory and then jumped sharply, as it did in September 2008, when Lehman collapsed.
But there are two differences.
That Libor-OIS measure of risk-taking shows banks have become more cautious about lending to the other banks, but not as much as they did from August 2007 onward.
And though European banks are again having trouble raising U.S. dollars, that seems to be another sign of diminishing trust between lenders, because the central banks are still auctioning off the greenbacks.
The lending and trading conditions suggest, the authors add, that stress is already present in the markets.
AOL News (June 14) -- Can you judge how close the global economy is to the brink of another financial crisis by measuring risk-taking in the markets?
Jacob Gyntelberg and Michael King, two researchers at the Bank of International Settlements (BIS), seem to think so. And they've found some alarming parallels between recent bank and investor behavior and the patterns preceding the global meltdowns that began in 2007.
The BIS is the so-called central bank of central banks, where the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and others come together to share information, policy ideas and economic research. It also acts as an agent or trustee to help international financial operations flow and a counterparty for transactions between central banks -- in other words, the world's lending facilitator of last resort.
In a commentary accompanying the latest quarterly BIS report on banking and market statistics called "Back to the Future," Gyntelberg and King compare the tumult of two and three years ago to the volatility of stock markets and credit markets in recent months as Europe grappled with renewed financial crises in Greece and elsewhere that threatened to spread across the Atlantic.
"The swift reversal in market confidence evokes painful memories of autumn 2008, when the collapse of Lehman Brothers brought money and capital markets to a virtual standstill," they write. "In both cases market sentiment deteriorated rapidly around a trigger event, with problems in one region spreading globally through the network of interbank funding markets and counterparty credit exposures."
To translate into nonfinancial language: After Lehman collapsed, investors around the world lost confidence in all banks with investment ties to Lehman -- which was many of the world's big institutions -- and panicked.
Market volatility surged, with share prices and indexes rising and falling in peaks and valleys, and investors fled from risky assets and put their money in safe havens like U.S. Treasury bonds.
Then, as recently, the Fed and other central banks quickly provided "exceptional" amounts of cash to banks in a bid to keep them lending, and governments announced rescue packages aimed at restoring market confidence and stabilizing the financial system.
But "while the broad outlines are similar, the Greek downgrade on 27 April and the subsequent market reaction may have more in common with the start of the subprime crisis in July 2007 than the collapse of Lehman Brothers in September 2008," Gyntelberg and King write.
The earlier crisis, a foreshock to the convulsions that led to recession, began when U.S. homeowners with subprime mortgages began to default and banks started disclosing the mounting losses they were taking on securities based on those mortgages. At the same time, credit rating agencies like Moody's began to wake up to how badly they had overrated these investments.
Suddenly, the cost of borrowed cash -- the lifeblood of any capitalist economy -- began to skyrocket. Banks were afraid to lend.
The differences between Libor, an international measurement of how much banks charge each other for dollar-denominated loans, and OIS, an industry amalgamation of rates for a kind of protective interbank loan transaction, were climbing. That meant banks weren't trusting other banks with their money and were charging higher interest rates for loans.
In particular, European banks faced increasing difficulties in getting their hands on U.S. dollars. And though stock prices kept rising, share prices became increasingly volatile.
What's scary is that this is exactly what economists have been observing over the spring.
The authors use graphs to show how a widely watched volatility index called VIX was following its July 2007 trajectory and then jumped sharply, as it did in September 2008, when Lehman collapsed.
But there are two differences.
That Libor-OIS measure of risk-taking shows banks have become more cautious about lending to the other banks, but not as much as they did from August 2007 onward.
And though European banks are again having trouble raising U.S. dollars, that seems to be another sign of diminishing trust between lenders, because the central banks are still auctioning off the greenbacks.
The lending and trading conditions suggest, the authors add, that stress is already present in the markets.
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