Sunday, November 20, 2011

Globally connected banking system still seems like risky business

On Wednesday, the Fitch Ratings service said, “unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen” and “the risks of a negative shock are rising". This news triggered a swift and negative reaction in U.S. markets with the S&P 500 closing down 1.7% for the day. Against this backdrop, senior U.S. financial executives struggle to explain and defend their “limited” exposure to Eurozone
debt.
MY TAKE: The global banking system seems to remain a beast that is difficult to analyze and understand. Limiting investor trust are 1) poor disclosure of potential risks, 2) the general complexity of financial structures, 3) the continued use of derivatives and 4) often suspect “off-balance sheet” issues . In addition, MF Global Holding’s ill-fated European sovereign debt bet, along with its attempt to use of hundreds of millions of dollars in customer funds to shield itself from its inevitable bankruptcy, is not reassuring. These dynamics support continued market volatility as investors respond with “sell first, ask questions later” trading.

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