With another trading session comes another bloodbath for the banks. In the month of January, global share markets seemed to be at the mercy of the change in the oil price. In fact, the markets were closely monitoring the course followed by oil prices. In the month of February, the financials have gained more importance.
A rough session with the European investors showed that Deutsche Bank is yielding 9.5%. This in turn is dragging the German DAX index down by almost 3.3%. Wall Street took its hint from Europe and eventually the American bank stocks crumbled down. Goldman Sach suffered a fall of 7.5 percent and Morgan Stanley toppling over 6%. Thereby, the four big banks of America collapsed by 3% in the morning trade with the investors bracing up to sell off the banks.
Profitability of Banks in Europe
20% of the bank stocks have been shed this year. However, this is much more than bad debts, emerging market jitters and tumbling energy prices. Exceptional low interest rates in Europe are the cause behind the serious profitability crisis of the banks. The profit that they make on the loans is also slashed when the interest rate falls down to 0%. It seems that this monetary policy is going to stick around for some time. Investors are worried that these banks might not even be able to repay back their loans. The realtors have come to terms with the reality that negative are not going to help the profitability of the bank.
Most of the banks have invested heavily in the large projects of oil. As the prices of oil slumped down, several companies that were behind the project crashed. As per the list complied by Hanes and Boone, the Houston law firm, about 42 companies of the United States have been bankrupted in the beginning of the year 2015. It is more likely that others will follow.
With oil price being the lowest in the last 12 years, banks like JPMorgan Chase, Citigroup and Well Fargo are stuck with huge loans in the energy sector and are hoarding money to cover up for the potential loss in their gas and oil loans.
The Absence of Liquidity
With US Federal Reserve putting an end to the quantitative easing program in the year 2014 and particularly after it began lifting the interest rate in December 2015; the liquidity in the financial market has been drying up. The new regulatory and the capital requirements that had been carried out restricted the bank trading activity and also cut down the number of rooms the banks appeared to have in their balance sheet to offer to the liquidity market. All of this was due to the fall in the commodity prices that led to the severe sell-offs in the potential market and also high-yield debt. This consecutively caused the shift of the liquidity risk to the buy-side from the bank.
The sovereign wealth funds of the nations that produce oils are dragging out money from the market to fill the shortfalls in their budget that have been created by cheap oil. The fiercely selling asset is setting off the oil prices.