Banks across the world have gone “ultra-safe” as they fear exposure to large corporate collapses caused by the coronavirus crisis, according to a senior banker, who asked not to be named.
This cautious approach has seen JP Morgan Chase and Wells Fargo announce they had increased loan-loss provisions to a combined $10bn.
“The main issue here is going to be what happens in the corporate world, and who’s got exposure to the big corporates,” says the banker.
“The banks are preparing themselves for what’s going to come in terms of how the corporate world is going to come out of this. Because clearly, there’s a lot of businesses that are close to the edge. Certainly, airlines are going to come under stress, and anybody who is near the brink is probably going to push a few companies or people from the corporate sector over the edge too.”
Banks have made a number of unusual moves as they get to grips with the pandemic.
“The fixed rate bond market over the past few weeks have seen some crazy levels from really big banks – traditionally really safe banks, Australian banks, Canadian banks and big Americans. Their fixed rate bonds are trading way above treasuries and way above libor, two or three percent above and the brokers I’m speaking to said that they’ve got many people like myself who are looking at the interest rates and thinking, ‘Wow these are great levels, I’d love to be cashing in’.
“But they were all in a similar situation to me where the constraint was, ‘No, we want to stay safe at the moment. We want to stay liquid we want to maintain capital.’
“Then, the fixed income market dried up and some of the levels you were seeing, they were really crazy, and that spilled into the deposit market as well. The Fed raised rates to zero but there’s some very big banks out there paying one and a half, two and a half percent for three-month money just because they need to get some cash in.
The market turmoil induced by what has been dubbed the ‘Great Lockdown’ has inevitably led to comparisons with the financial crisis of 2007-08, but the banker believes those comparisons are wide of the mark.
“I don’t see it as a banking crisis – clearly, it’s bigger than that in terms of the worldwide impact of what’s going on. I wouldn’t say that it’s brought around a banking crisis, but it’s brought around the same kind of result in terms of where the market is going,” he says.
Crucially, he believes that banks are better prepared for the downturn and the threat of corporate collapses due to post-2008 regulations forcing banks to meet stricter capital requirement levels, but questions remain.
“I think [banks] are better equipped [to deal with the crisis] but who knows how long, how deep this crisis is going to go and how much it’s going to affect the corporate world and how that’s going to slip into the banking world.
“The problem here is we’re facing a crisis that nobody ever envisaged. I think the banks are well capitalised. I’m not hearing or seeing anything that would lead me to believe that the major banks out there are going to go under.
“The banks are looking to raise funds and are looking to do it in order to support the markets not to keep themselves afloat is my take on it at the moment,” he says.