Daily Management Review

10 years after the crisis: Banks have not yet recovered


Many believe that the financial sector hardly suffered from the crisis that burst ten years ago. However, a new research of the analytical bureau New Financial shows that this is not quite so.

The additional capital, which appeared on the balance sheet of banks at the request of regulators, led to serious consequences. In the period from 2006 to 2016, return on capital of the world's largest banks fell by a third (more in the UK and Europe).

The alignment of forces shifted from the developed countries towards China, which in 2016 had four of the five largest banks in terms of assets compared to just one of the top 20 financial institutions in 2006.

The swaggering monsters of the investment banking sector were also hit hard. The sector's revenues collapsed by 34% in real terms, and profit - by 46%. Return on equity decreased by one third.

Employees are still receiving generous bonuses, but their salary has decreased by 52% in real terms.

The relative importance of different units has changed: the reduction in income was much higher in the sales departments, securities trading and capital raising than in the merger or debt issuance divisions, the British magazine The Economist writes.

The last change reflects the market trend in many respects. In 2016, despite the records on Wall Street, the stock market was less in proportion to GDP than in 2006; this can be explained by the fact that Europe and Asia showed weak indicators.

Markets of both state and corporate bonds were larger than ten years ago.

And although the crisis began because of excessive debt burden, the issue of corporate bonds has doubled in real figures for a decade, and the placement of government bonds fell by half.

Meanwhile, the market stepped up the game "who first finds" assets: the volume of stock trading, foreign exchange and derivatives increased in real numbers. In the corporate bond market, US securities’ trading has grown, and European debt obligations have declined.

At the height of the crisis, central banks launched a quantitative easing program to buy financial assets. This had a fundamental impact, especially on the bond market, where yields fell to historic lows (since then prices have risen).

Compared to equities, the cost of corporate and government bonds today is much higher (in proportion to GDP) than ten years ago.

This, as it turned out, has become a good environment for investment managers, the commission of which depends on the percentage of assets they invest. The sector's profit before taxes increased by 30% from 2006 to 2016.

At the same time, the investment sector has become more concentrated. The top 20 firms control 42% of assets (compared to 33% ten years ago).

Yet, the world still has high asset prices and a high debt load. Outside the financial sector, the debt burden is even greater than ten years ago.

Today, the total debt (state, individual and non-financial) reached 434% of GDP in America, 428% in the euro area and 485% in the UK.

In other words, borrowing moved to other areas of the economy, which did not make the financial sector less vulnerable. An unexpected collapse in asset prices or a sharp increase in the interest rate will reveal all the invisible threats.

Central banks are well aware of this, which is why they are so cautious with turning off monetary incentives. The financial crisis will be the center of the next economic crisis, as it has changed the least in the past decade.

source: economist.com