PA ANALYSIS: Banks are the bellwether that matters most

There were many lessons to be learnt from the financial crisis in the latter part of 2008 and we have been given a timely reminder of one of the biggest.

PA ANALYSIS: Banks are the bellwether that matters most


Principle among these lessons was that turmoil in the banking sector means a serious and wide-ranging market crash impacting everybody could be on the cards. While car makers, high street retailers and many other types of company can hit the rocks and see the unfortunate results limited to those directly connected to the business, this is very different with banks.

In the case of banks, as seen so spectacularly with Lehman Brothers and RBS during the height of the crisis, we are all on the hook. It is not stock of a product they have on their books it is our money.

Any investors who needed to be reminded were this week. It is no surprise that markets fell on scares over the health of Europe’s banks and then thankfully, recovered somewhat when cooler heads began to consider such fears to be overblown.

The murmurs over possible bank failures in Europe were the first clear and well defined reason to be concerned a major crisis could be brewing. The myriad of other headwinds and trouble spots in the global economy such as China’s suspect stock market, geopolitical tension in the Middle East and the Federal Reserve’s first rate rise are mere background noise in comparison to the possibility of another banking crisis.

For investors, this means particular attention must always be paid to the health of major banks when weighing up the risk level they feel comfortable with having in their portfolio.

Samy Chaar, chief economist at Lombard Odier Private Banking is among the ranks of those who are relatively calm over the health of Europe’s banks despite the storm clouds that appeared this week.  

“It is worth pointing out that European banks have considerably strengthened their positions since the global financial crisis, notably in terms of liquidity and funding,” Chaar said. “In addition, let us not forget that the European Central Bank is poised to act as a backstop if-and-when needed. This is why we would not be surprised to see near-term statements from the ECB before further measures in March aiming to stabilise the situation. There might be some elements that we are missing – are European banks the canary in the coalmine? – which is clearly the latest worry of markets. But if so, the ECB should be able to earn some time to stabilise the situation.”


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