Banking stress test

Stressed loans are one sign of a malaise in the banking sector that could precipitate a new crisis.

In 2009, the ratio of nonperforming loans to total gross loans in the world banking system amounted to 4.2 %. In 2015, according to the World Bank, that ratio reached 4.3%, writes author and former banker Satyajit Das in a Bloomberg column.

The change sounds fairly insignificant. But those ratios cover much more troubling numbers. At the time of the 2009 global crisis, stressed banking loans in the US (the subprime loans that triggered the panic) totaled about US$1 trillion. Today, stressed loans amount to US$3 trillion worldwide. In Europe alone, banks sit on US$1.3 trillion of nonperforming loans, and a US$400 billion chunk is in Italian banks alone.

The troubling trend goes beyond European borders. In China, total risky loans amount to US$1.3 trillion, according to International Monetary Fund calculations, yet private estimates notch them up higher. In India, stressed loans total US$150 billion. So, the banking world’s tectonic plates show a configuration that could precipitate a new financial crisis, says Das.

The writer goes on to identify some of the fault lines in the banking landscape. For example, he notes, historically overvalued property markets in the US, Canada, the UK and several European and Asian countries weigh heavily on banks.

The energy sector, which carries a total debt of nearly US$3 trillion, is struggling with declining commodity prices, lethargic growth, overcapacity and, in some countries, weaker currencies.

The flaccid recovery since 2009 is taking a toll on corporations, and low growth and deflation/disinflation making loan repayment more challenging. Finally, low interest rates have made safe assets less rewarding, pushing investment toward higher-paying and riskier assets. Furthermore, the flow of liquidity issuing from central banks has inflated asset prices – overvalued collateral against which banks are lending.

“Has the financialization of advanced economies gone too far?” asks Das. “Does the role of banking need to be altered to ensure that such crises are less frequent?”