1、How rising interest rates will strain,but not break,the worlds banking systemsThe end of easy moneyLONDON Economist Intelligence The Adelphi1-11 John Adam Street,London,WC2N 6HT United Kingdom Tel:+44(0)20 7576 8000 e-mail: GURUGRAM Economist Intelligence TEG India Pvt LtdSkootr Spaces,Unit No.1,12t

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6、ding organisations rely on our subscription services for data,analysis and forecasts that keep them informed about emerging issues around the world.We specialise in:Country analysisaccess detailed country-specific economic and political forecasts,as well as assessments of the business environments i

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8、 key themes and news analysis for six key industries in 60 major economies.These forecasts are based on the latest data and in-depth analysis of industry trends,available via EIU Viewpoint.Speaker Bureaubook the experts behind the award-winning economic and political forecasts.Our team is available

9、for presentations and panel moderation as well as boardroom briefings covering their specialisms.Explore Speaker Bureau for more speaker information.THE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20231Rising interest rate

10、s have caused turmoil in the banking sector.This may prompt a slowdown in lending,but not a repeat of the 2008-09 financial crisis.In a white paper published by EIU in October last year,we predicted that 2023 would be a difficult year for the banking and financial services sector,even though it had

11、emerged from the pandemic in a fairly robust state.In the past three months some of those difficulties have come to a head,with the failure of Silicon Valley Bank,Signature Bank and First Republic Bank in the US,and the forced takeover of Credit Suisse in Switzerland.In this report,we look at what t

12、hese events imply about the future of the banking sector in the US and Europe,as well as investor confidence.We also look at the impact on other regions of the world,and the potential effect that the uncertainty will have on corporate and consumer access to credit.Key takeaways:We do not expect thes

13、e bank failures to lead to a repeat of the 2008-09 financial crisis,but substantial risks remain.Interest rate hikes will raise margins,but also bad debts and bond losses.Regional banks remain vulnerable in the US.More bank failures are likely,consolidating the market further and improving competiti

14、ve positions for some banks,but also raising concentration risk.Emerging markets will not be significantly affected by the banking ructions but face their own risks from the interplay of bank and sovereign debt.Regulation and oversight will strengthen further,but regulators will be keen to avoid res

15、cuing every bank and raising moral hazard.Bank lending will continue to expand but will slow in the US and particularly Europe.A 2008-09-style financial crisis remains highly unlikelyThis year has seen turmoil in US and European banking markets.In mid-March the collapse of Silicon Valley Bank(SVB)an

16、d Signature Bank,two regional US banks,heightened investor uncertainty,raising the risk of bank runs and financial-sector contagion.In Europe 167-year-old Swiss bank Credit Suissewhich was designated by the Financial Stability Board as one of the worlds“globally systemically important banks”was take

17、n over by the countrys largest lender,UBS,for a fire-sale price of CHF3bn(US$3.25bn).In May California-based bank First Republic collapsed;its assets were sold by regulators to JP Morgan Chase at a cost of US$10.6bn.Despite these events,we do not think that a repeat of the 2008-09 global financial c

18、risis is likely.Bank capital adequacy ratios are generally healthy across the world for major banks.The implementation of Basel III international rules for capital and liquidity,as well as national measures,such as ring-fencing of banks in Europe,have made banks more resilient.Stricter rules for sys

19、temically The end of easy moneyTHE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20232important banks have also helped to prevent system-wide failures.In addition,the deposit guarantees available in the US and EU will help t

20、o prevent mass withdrawals,with the partial exception of wealthier clients whose deposits are above guaranteed limits.In response to the latest turmoil,moreover,financial authorities have moved to protect depositors funds at the failed banks(even those above the usual insurance cut-off).The emergenc

21、y lending facilities announced by the Federal Reserve(Fed,the US central bank)should be enough to stabilise the US banking system and avoid damaging runs on other banks.They allow banks to borrow Fed funds against the book value of their bond portfolios,to avoid the write-downs that hit SVB and Sign

22、ature so hard.Massive,concerted efforts by major central banks have also reassured investors in recent weeks.European banks in particular are more resilient than they were in 2008,owing to stronger euro-area bank regulation and supervision,and high levels of capitalisation.According to the European

23、Central Bank(ECB),more than 2,200 banks in Europe are now covered by the Basel III rules,though only 14 banks in the US are.Common equity Tier 1(CET1)ratios of major European economies are higher than The banks are alright(%)Sources:IMF;EIU.*End of period;Q3.Q1 2009.Tier 1 capital to risk-weighted a

24、ssetsNon-performing loans to total gross loansLiquid asset ratioReturn on equity20082022*USUKHong KongItalySouth AfricaIndiaFranceSpain20092022*Q2 2009Q3 2022ArgentinaItalyUKSouth AfricaGermanyHong KongSwitzerlandIndiaSingaporeUSBrazil510152025302009 101112131415161718192021 22048121620ArgentinaAust

25、raliaTurkeyUKUSCanadaIndiaBrazilHong KongGreeceSouth AfricaGermany10203040506070-4048121620UKNetherlandsUSJapanCanadaSpainAustraliaBrazilSouth AfricaIndiaHong KongTHE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20233in 200

26、8 and well above the 10.4%requirement of the ECB.Banks in major emerging economies,such as Brazil and South Africa,have also raised their CET1 ratios since the financial crisis,and these banks appear well-capitalised to weather the current financial worries.Remaining risks for banks stem from unreal

27、ised losses on bond holdingsUnlike in 2008,however,bad debts are not currently the problem for the banking sector.The industrys problems in the US and Europe arise out of market risk,specifically interest-rate risk.Sudden monetary tightening means that bond-heavy investment portfolios have experienc

28、ed a rapid erosion of value,which was what led to the collapse of SVB and Signature Bank.There are still very high unrealised losses on investment securities that could undermine US banks(see chart).Some banks may also face risks related to real-estate investments,particularly in the commercial sect

29、or.Unlike at SVB,major banks will probably not be forced to crystallise these losses,thanks partly to the regulators decisions to set up the new lending facility and expand the deposit insurancewhich means that they are unlikely to suffer a sudden run on deposits that they have to fund.Nevertheless,

30、the impact of sharply higher interest rates might expose fragile linkages in other parts of the financial sector,particularly among less well-regulated small lenders.Since 2018 regional US banks have not been subject to the tight capital requirements and other rules that larger financial institution

31、s must respect.If they were suddenly forced to account for the reduced value of their assets,many could find their capital buffers stretched very thin.Their share prices have been falling in recent monthsthe KBW Nasdaq Regional Banking Index is down by over 40%since its January 2022 peakas investors

32、 anticipate consolidation and increased regulation.We expect volatility in the banking sector to persist in the coming months,as continued monetary policy tightening is prompting investors to re-evaluate where and how they allocate their assets.We believe that there is a low risk that more systemica

33、lly important banks will fail in the coming months,and a much higher one that more regional banks will disappear.Unrealised losses for US banks on investment securities totalled US$620bn in Q4 2022(unrealised gains(losses)on investment securities in US$bn)Sources:FDIC;EIU.Held-to-maturity securities

34、Available-for-sale securities20080910111213141516171819202122150750-75-150-225-300-375-450-525-600-675-750THE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20234Financial contagion is unlikely,but emerging markets face their

35、 own risksThere are limited interlinkages between US and Europe banks and those in most other regions of the world.Moreover,even in developing markets,most banks are far better capitalised than they were in 2008-09,with regulators having gone some way towards implementing Basel III requirements for

36、the most systemically important of them.These factors limit the scope for direct financial contagion.However,some emerging and developing markets have their own risks,depending on sovereign debt levels and the strength of supervision.Emerging-market governments rely heavily on their banks for credit

37、,and these banks rely heavily on government bonds as collateral for securing funding from the central bank.Large holdings of sovereign debt expose banks to losses if the market value of government debt declines.For the past two years the IMF has warned of a possible feedback loop to banks heavy with

38、 sovereign debt.This could force banksespecially those with less capitalto curtail lending to companies and households.As the economy slows and tax revenues shrivel,government finances could come under even more pressure,further squeezing banks.The sovereign-bank nexus could lead to a self-reinforci

39、ng adverse feedback loop that ultimately could force the government into default or the“doom loop”.This happened in Russia in 1998 and in Argentina in 2001-02.Banking risks align with sovereign risks(EIU risk scores;100=high)Source:EIU.Top 20 banking risksBottom 20 banking risksSovereign riskBanking

40、 riskSovereign riskBanking risk020406080100YemenSyriaLebanonSudanVenezuelaMyanmarBelarusZimbabweLibyaCubaIranUkraineTurkmenistanEthiopiaSri LankaMozambiqueGhanaPakistanArgentinaTunisia05101520253035SwitzerlandDenmarkSwedenFinlandCanadaNorwayGermanyAustraliaUKFranceNew ZealandLuxembourgJapanAustriaNe

41、therlandsUSIsraelHong KongSingaporeTaiwanTHE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20235Regional strengthsAsiaBank capital adequacy ratios are generally healthy across Asia,and the regions major banks are largely fun

42、ded through domestic deposits,mitigating external financing risks.More globally integrated lenders reliant on external funding will be the first to feel the effects of current market volatility,but systemic risk remains low.A prolonged downturn in property markets would hold greater risks,particular

43、ly for Chinas largest banks,but stronger economic growth and government support are likely to reduce problems in the sector.Latin America Generally cautious lending practices by banks,the elimination of currency mismatches,and major improvements in regulation and supervision will protect Latin Ameri

44、ca as in the past.Most banks are not dependent,on the whole,on the external sector for funding,and most bank lending is funded by deposits.Capital-adequacy ratios remain sound and are mostly well above regulatory minimums.Profitability has recovered from pandemic-related lows and liquidity buffers a

45、re adequate,suggesting that the banking sector in Latin America will be resilient.However,individual banks with riskier lending practices might come under the spotlight,particularly if they face greater-than-expected credit risk from highly indebted corporates.Foreign funding reliance is low across

46、Asia(net foreign assets of commercial banks by geography,2022)Source:EIU.Value(US$bn)As a share of GDP(%)-1,000-50005001,000AustraliaBangladeshChinaHong KongIndiaIndonesiaJapanMalaysiaNew ZealandPakistanPhilippinesSingaporeSouth KoreaTaiwanThailandVietnam-50050100150200AustraliaBangladeshChinaHong K

47、ongIndiaIndonesiaJapanMalaysiaNew ZealandPakistanPhilippinesSingaporeSouth KoreaTaiwanThailandVietnamTHE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20236Middle East and AfricaMiddle East and African banks are largely shie

48、lded from the direct and immediate impacts of the turmoil,reflecting the fact that most of them are tightly regulated and conservatively managed and have sufficient capital and liquidity buffers.The biggest risks in the region are in those countries struggling with war or conflict,notably Syria,Leba

49、non,Yemen and Sudan.Moreover,the African region already has eight countries that are in default on their international debt,and 15 that are close to being so.The banking sectors in many of these countries are already fragile,and further sovereign debt distress would make them more so.Spreads between

50、 African bonds andUS equivalent(government ten-year maturity;basis points;end-period)Source:EIU.March 2022March 2023MoroccoMauritiusNamibiaBotswanaSouth AfricaNigeriaKenyaUgandaEgyptGhanaZambia-50005001,0001,5002,0002,5003,00020161718192021222305001,0001,5002,0002,5003,000South AfricaNigeriaMoroccoE

51、gyptAngolaAlgeriaAfrican credit default swap spreads(basis points)Latin Americas banking sector indicators are generally sound(2022;%)Sources:IMF;EIU.Capital adequacy ratioNon-performing loan ratio051015202530ArgentinaMexicoColombiaBrazilCosta RicaParaguayGuatemalaChilePeruBolivia012345ParaguayArgen

52、tinaPeruColombiaBrazilBoliviaCosta RicaMexicoGuatemalaChileTHE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence Unit Limited 20237Sources:BIS;EIU calculations.Basel III Implementation of 23 standards,as of Sep 2022CompletedPartlyIn progress

53、Not startedNot applicableUK23Switzerland23Hong Kong23US1931Canada1931Argentina1931Japan2111Singapore2111Brazil2111EU221Saudi Arabia221South Africa18122South Korea18221Indonesia1724Russia16142Australia15512135221MexicoIndia13334China1337Turkey212225Banking regulation may tighten and lending may slowA

54、s of the latest survey in September 2022,G20 countries varied a lot in their progress in implementing Basel III.Another set of standards came into effect on January 1st 2023,but adherence has yet to be measured.The latest bank failures are likely to lead to tighter enforcement and supervision of ban

55、ks,and perhaps legislation classing more lenders as systemically important(as Credit Suisse was).Lending,deposits and profits are still healthy at most banks.The most recent financial results,for Q1 2023,showed little sign of strain at major US banks such as JP Morgan,Wells Fargo and Citibank,with a

56、ll three reporting year-on-year increases in net profit.The same was true for major European banks such as Deutsche Bank(Germany),BNP Paribas(France)and HSBC(UK).Nevertheless,the current economic slowdown,with recessions in some countries,means that corporate debt defaults are likely to rise in the

57、US and Europe in 2023.Consumers are likely to be less affected,but households in G20 countries accumulated about US$3trn in new borrowing in 2020-22,which they will now need to repay at higher interest rates.This means that some patterns seen during the 2008-09 crisis could reappear on a smaller sca

58、le.Some borrowers are already in trouble,notably highly leveraged firms in the US and property developers in China.Bankruptcies have also risen in Europe,although this is primarily due to regulation changes in Spain that eased the process of bankruptcy filings.There will be some further defaults,but

59、 the risks vary widely according to the existing level of corporate and household debt and its duration.In any case,banks in most markets are well versed at managing bad-loan portfolios.THE END OF EASY MONEYHOW RISING INTEREST RATES WILL STRAIN THE WORLDS BANKING SYSTEMS The Economist Intelligence U

60、nit Limited 20238With these factors in mind,banks in both the US and Europe are likely to become cautious in lending policies,while companies and households will hold onto cash.Fed data show that most institutions are already tightening their lending criteria(see chart),although this has not yet had

61、 a major impact on US lending,which reached a record high in April 2023.If a slowdown does come,it will affect investment into some important sectors of the economy,delaying the economic rebound.To shore up their deposits,meanwhile,banks will have to push through more rate rises,narrowing their marg

62、ins.Even so,wealthier clients whose deposits are higher than the insurance guarantees may seek out alternative investments(gold prices are rising rapidly,for example).Regulators are unlikely to extend their guarantees further than they have already done,for fear of creating moral hazard.Taking state

63、 stakes in failing banks may be a better option,as it was in 2008-09.Nevertheless,for most banks we expect that the advantages of better interest margins will to some degree outweigh the costs of loan losses in the early years of our five-year forecast period,with a firmer recovery thereafter.Althou

64、gh more banking consolidation is likely over the next year,most banks will survive and thrive.Borrowing costs are rising in the euro zone;so are bankruptciesSources:Eurostat;ECB;EIU.Firms borrowing costs(%per annum)Declarations of bankruptcies(2015=100)201920212200.51.01.52.02.53.03.5225060708090100

65、20192021Economic uncertainty is weighing on USbank lending(net%of domestic banks tightening standardsfor commercial and industrial loans)Source:US Federal Reserve.Large and mid-size firmsSmall firms201920212223-40-20020406080 The Economist Intelligence Unit Limited 20239EIU Viewpoint:Country Analysi

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