One of the main causes of the financial crisis is still ongoing despite promises to end it.
By LUIS MIRANDA | THE REAL AGENDA | SEPTEMBER 17, 2012
The banks that were bailed out during the crisis (2008-2010) maintained risky practices in their lending operations, the same ones that helped deepen the financial crisis. This is the conclusion of the latest quarterly report from the Bank for International Settlements (BIS). The bank of central banks wonders “whether the bailouts undertaken during the financial crisis, reduced the level of risk assumed by banks in their lending operations.”
To answer the question, the BIS, based in the Swiss city of Basel, analyzed the balance sheets and formal loans of 87 large internationally active banks, of which half received public financial support during the crisis. These banks cover bank assets worth 54 billion dollars (41 billion euros), according to official numbers, which correspond to 52% of global banking assets.
Of these 87 banks, 40 institutions received recapitalization monies from publicly funded programs between the third quarter of 2008 and the second in 2010. These recapitalizations stood at $350 billion dollars (267.175 billion euros) between 2008 and 2010. Most of the funds were injected in the fourth quarter of 2008 and the first quarter of 2009 mainly in the U.S., France, Germany, Netherlands and the UK.
The recapitalization of banks with public funds in G10 countries plus Austria, Australia, Spain, was of about $500 billion (381,680 million euros) in 2007-2010. The report says that the banks had returned to 50% of the capital injections in September 2010, something that many financial analysts question. The banks that allegedly returned that money are located in France and the U.S.. The BIS concludes that “the rescued banks did not reduce the level of risk of their new loan portfolios significantly more than the banks that did not receive public assistance.”
The rescued banks continued formalizing risky loans, as reflected in their participation in the leveraged loan segment the relaxed overview of the conditions attached to those operations. The rescued banks continued adding formalizations leveraged loans in total and also increased the average maturity and Libor spreads of their new loans, said the BIS.
The rescued banks had taken more risks than non rescued ones in these dimensions before the crisis. The BIS analyzes the international market for syndicated loans, representing 18% of total bank loans. Syndicated loans have been one of the major sources of corporate financing with about $ 7 billion (5.3 billion euros) of new operations formalized in 2007.
The report states that those banks that are still carrying risky loans most likely believe that there will be more free money from central banking institutions coming to them, especially at the national level. That is, banks that continue to issue risky loans believe that more rescues will occur just as they did before the collapse of 2008. “Indeed, it is consistent with the literature on the effect
of (actual or expected) state support on bank risk,” says the report in its conclusions.
Read the report issues by the Bank of International Settlements here.