It’s been just a few days since global markets decided to sell off their bank holdings. Big banks like Credit Swiss [VTX:CSGN] and Deutsche Bank [ETR:DBK] that bore the brunt of the market.
Australia’s Big Four banks weren’t exempt from this phenomenon either. They’re down 15% or more for the year. And with the way things are going, it doesn’t seem they’re safe from further selling.
Source: Yahoo Finance
No more misbehaving
Prior to the 2008 financial meltdown, banks had very little regulation. This allowed them to do almost anything. By that I’m referring to increasing their risk to earn higher returns. Their activities ranged from taking on riskier loans to extreme leveraging. When you leverage something, you borrow money in a bid to increase returns. So companies were borrowing more money than they were worth in a bid to increase their returns.
Since 2008, regulators have been determined to discourage banks from doing something similar ever again. Banks are now forced to hold more capital and engage in less risky investments. All told, the rules have gotten tougher for banks.
Deutsche Bank’s CEO, John Cryan, said in January, ‘It’s hard to stand up and smile a lot and give much of a vision for a bank. We’re a bank, we’re a regulated entity. We don’t have much latitude in what we do.’ Cryan is saying that banks can no longer create exciting profits or take on large amounts of risk. I’m sure these things would excite Cryan. But it definitely didn’t excite taxpayers back in 2008.
US taxpayers forked out US$700 billion in order to keep struggling banks alive. Australian banks weren’t affected to such a large extent. However we are now seeing the effects of tighter rules coming to our shores.
Since global markets are scared to put their faith in banks, our own Big Four have been caught up in the selling as well. The Australian banks are somewhat reliant on foreign capital. This means if overseas capital is anxious, funding will cost more.
But, if bank selloffs continue, will regulation start to loosen up? Maybe, but right now markets are still recovering from their 2008 hangover. Banks must redeem themselves after stealing US$700 billion from taxpayers. In an effort to punish banks, regulators have demanded them to be stuffed full of cash. This forces banks to sit on capital, rather than using it to make more. Unfortunately, Australian banks are being punished through no fault of their own.
Junior Analyst, Money Morning
PS: Australia’s Big Four banks could be in for some more selling. But there are other blue chip companies that have been oversold by the market.
Global markets are filled with pessimism right now, but a turnaround is expected soon. And with a bounce these beaten down blue chips could reclaim what they’ve lost.
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