The Fearful Return of Bank Problems
Banking confidence showed sharp improvements in April and May. However, the key market measure determining the health of big financial institutions globally has deteriorated this month.
Investors are betting against the banks again.
Credit default swaps, the derivatives used to measure the price of bet that big banks will surely default on their debt, has risen in June by 17% – this is data according to New York-based Credit Derivatives Research. The increase in wagers against banks like Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500), and Bank of America (BAC, Fortune 500) comes as doubts on the banking sector and the health of global economy re-emerge.
In the past two weeks, blue-chip S&P 500 dropped 6%. Also, KBW Bank index slid 20% since its recent high on May 11.
After a strong rally, there’s no doubt that some selling is inevitable. But in a Monday report of World Bank, it predicted that global economy will shrink to 2.9% this year. “Somehow, this touched a raw nerve,” declared Mauro Guillen, Lauder Institute’s director at University Pennsylvania Wharton School. He added, “Although we’ve been optimistic for a long time, we still have not finished fixing the financial system.”
Guillen advocates taking action to restore the economy’s credit system before it resumes expanding in earnest. This means implementing plans to attract buyers from the private sector in purchasing bank assets. Earlier this month, regulators shelved such program. Through Congress, he recommends pushing the financial regulatory reform program.
However, Robert Claassen, chair of the structured products practice and derivatives at Paul Hastings, international law firm, said that momentum for a sweeping change has already ebbed in recent weeks.
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