=DJ Japan's Troubles Are One Piece In Global Banking Jigsaw
14 Mar 19:40
By John Parry
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Japan's troubled banks were at the epicenter of global
equity and bond markets gyrations Wednesday.
But Japanese financial institutions may turn out to be just the first in line
to get hurt.
"In general, the feeling was today that globally banks had some risk
associated with them," said Gemma Wright, director of market strategy at
Barclays Capital in New York Wednesday. The catalyst for this sudden turn in
sentiment, Wright said, was ratings agency Fitch's announcement it was placing
several Japanese banks on negative credit watch.
That was blamed for a big market-wide sell-off in U.S. stocks which led to a
3.1% drop in the Dow Jones Industrial Average and a concurrent slide in
European equities. But it was bank stocks which fared worst: Citigroup Inc. (C)
lost 7.2%; Bank of America Corp. (BAC) shed 4.6%; Deutsche Bank AG (G.DBK) fell
5.3%; HSBC Holdings PLC (HBC) was down 5.0% and ABN Amro Holdings NV's (ABN)
U.S.-based ADR shares dropped 4.3%.
At first glance, Japan's situation is unique. After struggling for a decade
with an unshakable bad loan burden, the latest slide in the Nikkei stock index
to 16-year lows is expected to severely undermine the quality of many banks'
balance sheets for the March 31 fiscal year-end. And new accounting rules that
require Japan's banks to mark to market their equity holdings could weigh on
future earnings.
Yet in other respects, the worsening state of banks in the world's second
biggest economy is a symptom of the global economic downturn that's putting
pressure on banks worldwide.
"Japan is the weak link," said Sadakichi Robbins, head of global fixed-income
trading at Bank Julius Baer in New York. "The next leg... is that U.S.
financial institutions are also vulnerable to a global downturn," he said.
More Global Risks On The Horizon
And the risks are rising for global banks, many analysts say.
"Clearly there will be more problems this year, because the U.S. and global
economy will be shakier," said Al Sanborn, president and chief executive
officer of the U.S.-based Risk Management Association.
Sanborn expects to see "more of an earnings problem, than a systemic problem
for North American banks through 2001," with a rise in non-performing loans and
additional charge-offs, while he notes that the rate of defaults on high yield
bonds in the U.S. is at high levels.
This bitter brew of lower earnings, higher default rates by borrowers and
rising non-performing loans in different parts of the world is creating a more
hostile business environment for banks.
"That Japanese banks (pose) a systemic problem...is not news at all," said
Vincent Truglia, managing director and co-head of the sovereign risk unit at
Moody's Investor Services in New York. What's new, he said, is the combination
of simultaneous stresses on different parts of the global banking system at the
same time.
"Finally, markets are focusing on (the Japanese banks) because there is a
concentration of weaknesses in many markets," Truglia said. "Everyone is
looking around for what are the weak links in the system."
Goldman Sachs highlighted these risks Wednesday when it downgraded its
earnings estimates for some of Europe's biggest banks, cutting its forecasts
for Dresdner AG (G.DRS), Commerzbank AG (G.CBK) and Deutsche Bank.
These downward revisions, set against the backdrop of Japan's woes, fueled
some "fears of a global systemic meltdown," said Mary Ann Hurley, vice
president of fixed income trading at Seattle-based brokerage D.A. Davidson.
It's Not 1998
To be sure, the risk of widespread systemic financial risk, or contagion,
seems lower than existed before the global financial crisis in 1998. At that
time, hedge funds and banks'proprietary trading desks had built up an
unsustainably high level of leveraged positions in risky assets that left them
exposed to a web of interconnected counterparty exposures. Analysts say much of
that excessive leverage has since been unwound.
And many U.S. banking analysts were quick to point out Wednesday that as a
proportion of their total assets, U.S. banks' exposure to Japan is very small.
Citigroup has the biggest presence in the country, but only 1.4% of its assets
are in Japan.
And if the global banks were really panicked about Japanese banks Wednesday,
it didn't show up in the eurodollar market, where the so-called Japan premium
that arose in the midst of the 1998 crisis failed to reemerge. Three-month
borrowing rates for Japanese banks in the interbank market were up by two or
three basis points on the day, according to eurodollar brokers, but that was
well short of the 50-basis-point premium charged to shaky Japanese
counterparties at the height of the 1998 crisis.
Still, at least one prominent U.S.-based economist who tracks Japan expressed
concern Wednesday about the possible ripple effects.
"U.S. banks and European banks have major trading relationships" with
Japanese banks, "and there are (also) potential disruptions to derivatives
markets, which are hard to quantify," said Carl Weinberg, chief economist at
High Frequency Economics in Valhalla, NY in a conference call Wednesday.
Weinberg sees a 90% probability of at least one Japanese bank being declared
officially insolvent after the March 31 year-end.
And Moody's Investor Services Japan banking analyst Rieko McCarthy warned
Wednesday that both Daiwa Bank (J.DWB) and Chuo Mitsui Bank remain close to
technical insolvency and that these two banks are particularly vulnerable to
falling equity prices.
-By John Parry; Dow Jones Newswires; john.parry@dowjones.com; 201-938-2096
(END) DOW JONES NEWS 03-14-01
07:40 PM |
