Sunday, December 20, 2009
Banks Need Not Learn
"Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years. ... The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt--but with much shorter maturities. ... The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner than later. Globally, the average maturity of new debt rated by Moody's fell from 7.2 years to 4.7 years in the past five years. ... The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. ... Large banks such as Citigroup Inc. and Bank of America said they expect no problem refinancing at affordable rates and that they have historically high levels of cash to cover maturing debt. Their funding needs are likely to be lower anyway because of sluggish lending and sales of assets or business that require debt funding. ... The government debt also was sold at markedly cheaper costs. A Baa-rated bank that sold government-backed three-year debt would have paid a coupon of about 1.3%. That same bank would have to pay 7.75% to sell 10-year debt, according to Moody's. That is important because banks are being pressured to sell longer-term debt", Carrick Mollencamp & Serena Ng at the WSJ, 24 November 2009, link: http://online.wsj.com/article/SB10001424052748703819904574554223793153390.html.
Banks can get in trouble on both sides of their balance sheets. They should not run "unmatched" books. The regulators should prevent this. Zimbabwe Ben could easily be suppressing interest rates 6.45% (7.75% - 1.3%) to float the banks.