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Monday, October 17, 2011

Wall Street analysts agree: recapitalizing Eurozone banks will not restore confidence

According to a Telegraph article by Harry Wilson, Wall Street banking analysts argue that recapitalizing the Eurozone banks will not restore confidence.

This blog has made this point repeatedly and it is nice that the Wall Street banking analysts are confirming it!

Hopefully, the global policymakers and financial regulators are listening.

The article makes another important point.  Specifically, that banks are having a difficult time funding loans.

It is this point that has driven a considerable amount of the policymakers' and financial regulators' response to the financial crisis.  They have tried to provide the liquidity and capital (think bailouts) so that the banks can keep lending.

Unfortunately, the policymakers and financial regulators mis-interpret what it takes to keep the bank lending channel open.

Yes, we need banks to continue making loans.  But, we do not need banks to hold those loans on their balance sheets.

There is a better, easier solution.  Fix structured finance.

Ironically, the fix for structured finance is the same fix for restoring confidence in the banks:  detailed disclosure.

If market participants had access for each structured finance security to detailed disclosure on the underlying assets' current performance, they would be able to assess the risk of and value the security.  This in turn would lead to both an active primary and secondary market for these securities.

If banks can distribute the loans they make into the structured finance market, then their balance sheet is no longer a constraint on their lending.

Without spending a pfennig on recapitalizing the banks, by simply bringing detailed disclosure on the underlying assets' current performance, confidence is restored and the credit markets are re-opened.
Like UBS, Morgan Stanley argues that the European Union-led recapitalisation of banks will not improve confidence in the sector and that what is needed is a new government-guaranteed funding scheme to back longer-term bonds. 
Without this support, Morgan Stanley said small business lending and trade finance loans could all be at risk of cut backs.

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