There may be trouble ahead

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Is there systemic danger lurking in the financial sector? To any regulator worth his or her salt, the answer to that question must always be yes.
But to those for whom scepticism is not part of the job, it might appear to be a redundant question. Recent banking crises have arisen out of poor controls, too much decentralization, bad management and unforeseen events suddenly swamping weak institutions.
The last few years have been characterized by moves to address these concerns. Risk management is now more sophisticated, and a central tenet of most banks' operations. Management has a better grasp of the subject. There's not much to be done about the unpredictable high-impact event, but banks appear more prepared than ever to manage most crises.
Size plays a role here: there are fewer players at the top table for whom a $500 million loss, such as at Bankers Trust, or a $1 billion loss that felled Barings, would be fatal. The crisis following the Russian default and collapse of Long-Term Capital Management showed how a small group of large players could avert a meltdown.

But has size become a problem? A handful of banks are responsible for the majority of credit provision. They can extend that through loans, short or long-term debt, and equity capital raising.
And they hold significant retail assets.
There is ample evidence that institutions tie loans business to getting more profitable mandates and that many loans are mispriced. Furthermore, the Bank for International Settlements suggests banks use their own methods to decide how much capital to set aside as a cushion against falling asset values.
The upshot is a banking system dominated by the few, and regulated by them as well. This is precisely what the Glass-Steagal legislation of the 1930s was meant to prevent. The acquisition of banking systems in emerging markets by global banks looks like a good thing. But although such a system can withstand more pressure, it is more likely to precipitate a wider crisis if the walls are ever breached. Now the financial system is more global than ever, national borders more porous economically and more susceptible to major crises elsewhere, this prompts the question: is consolidation bad?
Perhaps this is overstating the point. But a financial system of giant banks complacently regulating themselves might invite trouble.

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

The US treasury market reaches breaking point

There may be trouble ahead

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