Black holes and new stars

Well-capitalized banks with ample liquidity, diversified funding and conservative risk management will fare better during the coming downturn than the former champions that took on excessive leverage and risk in the bull market. Banks with businesses in emerging markets should benefit from more resilient earnings.

WHEN WILL THE bad news end for banks? It would take a brave investor to reply with conviction any time soon. Many investors are still in a state of shock at the speed with which banks have revealed losses on highly rated securities and assumed assets and liabilities that were once invisible in off-balance-sheet vehicles. If complex credit assets of the banks’ own devising and recently rated AAA can be marked down so savagely and so quickly, what else might be?

It seems that the CEOs of banks with trillion-dollar balance sheets are not always aware of what is on them and have no clear idea how these problems will work out. Five weeks into his job as CEO of Citigroup, and in the midst of a review of which parts of the conglomerate to keep and which to jettison, Vikram Pandit had to outline three areas that simply can’t wait for that review and demanded urgent action in January: "our balance sheet, risk management and expenses". The first two are fundamental for any bank and the third is scarcely less important. Pandit added: "These are obviously complicated times in the market."