Banks: Contagion threatens still-vulnerable banks
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Banks: Contagion threatens still-vulnerable banks

When Bank of America’s share price collapsed last month, most equity analysts blamed the sell-off on investors taking fright at the prospect of a double-dip recession in the US that might further impair damaged housing assets on the bank’s balance sheet that it might not have adequately written down yet.

Bankers all claim to be shocked by investors’ inability to see just how much more robust the financial system is now than in the run-up to the Lehman bankruptcy when banks were over-leveraged and had used an excess of cheap short-term wholesale funding to fill their balance sheets chock-full of rotten mortgage-related assets that did not deserve the high credit ratings they had been assigned. That was then, bankers say, this is now and it is not a second Lehman moment. In the years since, banks have raised equity to improve their capital resources, sold off bad assets and built reserves against those they still hold. Those that went into the financial crisis with high loan-to-deposit ratios have improved their funding mix, termed out wholesale liabilities, sought deposits and even if market funding is interrupted have a limitless provision of backstop liquidity from central banks.

So what exactly is there to worry about?

Well, let’s see. It doesn’t much help a bank even if it has reduced its leverage ratio if it then turns out that the assets it has levered are bad ones.

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