Moody's saying there's no problem TJ! Banking crisis fears exaggerated, episodic liquidity help may be needed-Moody's
08.21.07, 3:03 AM ET
MUMBAI (Thomson Financial) - Fears of a global banking systemic crisis remain exaggerated, given that the 'core' of the system is still comfortably shock-resistant, Moody's said.
However, it added the ongoing resilience of the system may remain more dependent on episodic liquidity assistance from central banks than originally thought.
In a report, the agency said the events of recent weeks -- which featured some small-size bank casualties in Germany and large scale interventions by several central banks to restore orderly conditions on money markets -- potentially cast into question Moody's (nyse: MCO - news - people ) contention that fears of global banking systemic risk were exaggerated.
Nonetheless, Moody's said it believes the intensity of the crisis will depend whether or not the 'core' financial institutions are shock-resistant.
'Notwithstanding the possibility of a severe depression of earnings attributable to asset impairment, higher funding costs and lower business volumes, our long-held view that the largest and most sophisticated US and international financial institutions have a high pain threshold remains unchanged,' explains Pierre Cailleteau, Moody's chief international policy analyst and author
of the report.
'Isolated casualties, if they happen, are therefore much more likely to occur at the periphery, among smaller institutions that
may or may not be assisted depending on their respective countries' aversion to bank failures,' he added.
That having been said, Moody's acknowledges that the nature of today's global financial system makes it vulnerable to confidence shocks and, by extension, liquidity shocks.
It attributed this view to the fact that risks are dispersed in the system -- which has favourable implications in terms of the solidity of the pillars of the system but also fuels anxiety at times of stress.
'Therefore, although systemic risk is very likely to be avoided because the core financial institutions are able to absorb losses, the system may remain dependent on episodic market 'peace-keeping' operations carried out by central banks -- which may become an enduring feature of our global financial system,' Cailleteau concluded. |
