The real reason mature markets are losing steam



There would be little or no need for commercial banks if everyone always paid their debts in full and on time. Everyone would then have the best possible credit score, no need for supervision, and could borrow or lend at the default interest rate. Although many formal macroeconomic models (implicitly) assume a flawless system in their so-called trans-versatility assumption, this is not a feature of the real world. Indeed, the probability of default (PD) is a critical concept in any assessment of financial fragility. The term “Financial fragility” is most often associated with Hyman Minsky financial instability hypothesis (FIH), which was published over 30 years ago (Minsky, 1975). According to the FIH, during a resumption of an economic cycle, a capitalist market economy progresses naturally through three states or regimes.


With the rise of non-financials corporate debt and evidence high borrowing levels among non-bank financial corporations, the fragility caused by excessive indebtedness has returned to haunt the financial markets of developed countries. The fact that the bankruptcy of an unrecognized family office business Archegos Capital Management led to massive losses for major banks suggests that the bankruptcy of a rogue and over-indebted speculator may have systemic consequences similar to those seen in 2008. At the end of March 2021, when the world was exhausted from the ongoing pandemic fight for Over a year ago, news broke that Wall Street traders were looking for the source of a $ 19 billion off sale of tech, media and other stocks. This explosion in sales caused the stock prices of companies such as Viacom CBS, Baidu and Tencent Music to collapse, wiping out an estimated $ 33 billion in shares.

The Archegos incident: too big to fail?

Archegos, the family office of the former Tiger Capital Management portfolio manager Bill Hwang, caught the attention of investors around the world in mid-March when the company suffered catastrophic losses due to a portfolio with two major flaws: high leverage and intense concentration in a few actions.

The Archegos mess has caught the world’s attention not only because of the scale of the losses, but also because of its distinct vibe before the financial crisis. There were derivatives, huge losses, exposure for the big international banks, counterparty risks, all the hallmarks of the 2008 collapse. However, as dire as Archegos’ business outcome was, the billions of dollars of accumulated losses in banks (in particular, their prime brokerage units) that facilitated transactions did not spill over into other markets. Specific stocks in the portfolio have certainly been hit hard, as evidenced by the Viacom share price, and brokers that have suffered losses, such as Credit Suisse and Nomura, have also been hit by their stocks, but overall volatility has been hit. of the market has not increased. In other words, a multibillion dollar collapse into a massive fund to which some of the world’s biggest banks had massive exposure has been largely ignored by the financial system as a whole.
ANDThis is excellent news, it shows that the reforms put in place in the aftermath of the global financial crisis to increase the amount of capital held by banks have been successful.

Global banking system turns protectionist

The US banking system was heavily indebted as the collapses of 2007 and 2008 approached. Bank loans accounted for over 90% of risk-weighted assets and are on the rise. Tier 1 capital, which includes frontline equity for internally generated losses and profits, contributed only about 8% of the funding. This figure is much higher and more stable after the crisis, at 12%. Banks accumulate more capital and borrow less against their assets. Leverage has decreased, while capital has increased. This is important because if a bank has capital equal to 8% of its assets, it is technically insolvent if the value of its assets drops by 8%. Banks have raised the bar for insolvency by raising capital levels in the event of a sudden drop in the value of their assets. Financial fragility is recognized as an important issue for individual well-being. According to various estimates, between 46 and 59% of american adults are financially fragile and therefore vulnerable in terms of well-being. We argue that the role of financial control in shaping welfare outcomes has received less attention in the literature than the role of financial fragility, it is just as or even more important. The total amount of household debt in the United States is 13.5 trillion dollars (Federal Reserve Bank of New York 2019, or 80% of the total amount of debt in the United States). Gross domestic product (GDP) (International Monetary Fund 2019). It is currently at an all time high, putting U.S. creditors in a vulnerable position and increasing their vulnerability to external shocks (eg, the COVID-19 pandemic). These high levels of debt were previously linked to a lack of financial planning skills, poor financial management, and harmful consumer behaviors resulting from the belief that material possessions can lead to happiness.

The curse of Covid-19

In addition to skyrocketing infection rates, the COVID-19 pandemic has resulted in widespread lockdowns, a dramatic drop in production and an increase in poverty. Behind these trends, a calmer financial crisis is gaining ground. The financial fallout from the pandemic does not take into account regional or socio-economic differences. Non-performing loans are increasing in financial institutions around the world. COVID-19 is also a regressive crisis, disproportionately affecting low-income households and small businesses with fewer assets to avoid bankruptcy.
Macroeconomic policies sought to offset the sharp declines in economic activity associated with widespread closures since the outbreak of the pandemic. The richest countries were able to react more quickly. Multilateral lending institutions have also contributed to financing the response to the health emergency in developing countries. Temporary moratoriums on bank loans to households facing unemployment and struggling businesses have also contributed to the macroeconomic response. Financial institutions in all regions have granted grace periods for loan repayment. The understandable rationale has been that because the health crisis is temporary, so is the financial distress of businesses and households. However, as the pandemic progressed, many countries found it necessary to expand these precautions. Banking regulations have often been lax in terms of provisioning bad debts and determining non-performing loans. Even with the vaccines available, significant financial damage has already been inflicted. Abstention policies have proven to be an effective coping mechanism, but even extended grace periods must end. As 2021 progresses, more will be learned about whether the problem facing countless businesses and households is insolvency or illiquidity. High leverage will exacerbate the problems in the financial sector.

This type of deterioration in the balance sheet takes time to repair and often precedes a long period of deleveraging. The lending practices of financial institutions are becoming more prudent. A credit crunch is usually a big obstacle to recovery.


It has been suggested that government interventions can be sclerosing or liquefying and that the destabilizing consequences of government policy should be considered in the areas of banking, taxation, monetary control and also the lender of last resort. . Activist governments will be unable to rid their economies of financial fragility, and efforts to reduce fragility may backfire with unintended consequences. Knowing that financial factors can act as sources or propagators of shocks does not always translate into effective options to mitigate the sclerosing financial effects. Financial fragility is an inevitable by-product of a vibrant capitalist economy.


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