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As ever, the IMF’s latest Global Financial Stability Report is worth a look, not least because the organisation’s chart makers seem to be getting a lot more creative. Some of the infographics in the report’s latest edition verge on the psychedelic.
More importantly, however, the IMF issues a stern rebuke to financial regulators for “incomplete policy actions and inadequate reforms”. The global banking system remains vulnerable to shocks, as some lenders remain “caught in a maelstrom of interlinked pressures”, the IMF warns.
Euro area banks are singled out as particularly vulnerable. Thinly capitalised and more reliant on wholesale funding than many of their counterparts elsewhere, some of the currency union’s banks—particularly those in the bloc’s troubled periphery—are now shut out from most funding markets. This is reflected in the interest rates that the most desperate banks are offering on deposits, seeking to reduce their reliance on official support by luring funds from wary savers.
The rate hikes by Greek, Portuguese and Irish banks in recent months have been significant, dampening these institutions’ profitability and prolonging an already protracted recovery process. Another interesting conclusion to draw from the chart—adapted from the one that appears in the IMF’s report—is that banks in Italy seem relatively more desperate for deposits than banks in Spain.
The Bank of England’s latest “Trends in lending” report paints a subdued picture of credit conditions in the UK. The overall stock of lending continues to fall, particularly for small and medium-sized businesses.
A section of the report on banks’ liabilities, meanwhile, gains extra significance in light of the stubbornly high inflation data released last week. Savers, desperate to keep up with inflation, much less earn real returns, are increasingly squirreling away their money in higher-yielding time deposits with longer maturities. (Guaranteed inflation-beating national savings certificates were recently withdrawn, which makes Buttonwood’s blood boil.)
The share of fixed-rate retail deposits of one year or more has doubled over the past two years. The Economist Intelligence Unit does not expect the Bank of England to raise its policy rate from the all-time low of 0.5% until late this year, prolonging savers’ desperate search for yield for some time to come.
The data is noisy and, at times, somewhat contradictory. Yesterday, banks’ use of the European Central Bank’s 0.25% deposit facility fell to its lowest level of the year, with “only” €28.5bn parked at the central bank. This can be seen as a sign of renewed confidence among euro zone financial firms, particularly when it comes to interbank lending—banks may be deciding to lend more to one another, instead of stashing cash at the ECB.
However, on the same day, use of the ECB’s 1.75% marginal lending facility hit a two-week high. The previous high, in late September, proved to be a one-off spike. Sustained borrowing at the current level—last seen during the spring, when fears of a sovereign debt crisis reached a crescendo—would suggest that it is still difficult for some European banks to attract private funds. This warrants watching.
It wasn’t that long ago that fears of a flight in deposits at Russian banks reached fever pitch. Sour loans and a rouble rout threatened to push lenders to the wall. The government pledged US$200bn in support, if needed.
In the end, a full-scale banking crisis was avoided, although a number of smaller banks failed. The survivors—particularly at the larger end of the scale—are now performing admirably, especially considering their recent travails. Reflecting both renewed confidence in the banking system and a lack of appealing alternatives, deposits are climbing steadily even as interest rates are cut. Russia’s Deposit Insurance Agency reckons that bank deposits will grow by 25-30% this year.