Nobody trusts the banks, and even less the suggested formats to bail them out in case of a crisis
. There is too much fear about the consequences, therefore creditors are in short supply. And not only for shares, but also for CoCos, or contingent convertible bonds, that invention that allows you to recover money lent to a bank if things go well. But if things go badly, the bonds are converted into shares which, to make matters worse, take a sharp tumble.
It’s understandable that nobody wants to invest in banks, particularly as the recovery now seems to be shaky and the spectre of deflation is back. This has a very negative impact on the banks’ profitability because the margins on short to long-term rates become narrower. And this is the bank’s basic business, borrowing short-term and lending long-term.
But now a period of a drop in long-term rates is approaching, while there is great uncertainty over whether the Central Banks can raise the yield curve this time round. In other words, raise inflation and growth expectations, as now it’s not good enough just to talk about it. Yellen put her foot in it by raising rates, because she has sparked doubts over whether she really wants to respond to facts, or appear in the photo as the first one to “normalise” interest rates.
The response to that rise has been devastating: a decline in long-term rates and a drop in yields. And if we start talking about negative rates, then it’s better to shut up shop, as this post explains.
And is what has been done on the regulation front sufficient?
No-one knows. But what they do know is that it has complicated regulation so much that you need a master’s to understand it. It used to be said that CEOs didn’t understand anything about the products they sold. And now they don’t know if they are complying with the regulations. But there is one thing that’s certain. No matter how much regulation is put in place, if it does not boost the end of the chain, ie final demand, you will write many illegible and useless pages.
It’s very difficult for things to get back to normal without trustworthy banks.
And it’s very difficult to have confidence in them if there are not high expectations for growth and inflation. A light purse makes a heavy heart, as the saying goes. But that’s not the point. What is the point is that demand is in the doldrums and needs to be boosted.