Thursday , 25 July 2024

Be Forewarned: Worldwide Systemic Financial Risk is Rising Rapidly – Again


The credit risk of the 30 large global financial entities representing the most systemically worrisome firms in the world just broke an important channel. It is now at its highest level in over four months having increased 14% in just the last three weeks which is extremely fast. At current levels we are now almost twice as risky as we were prior to the financial crisis and there  is increasing concern that there might be another round of insolvencies or collapse of the financial industry. [Let’s take a closer look.] Words: 630

So says an article* at which Lorimer Wilson, editor of , has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. The article goes on to say:

The chart below tracks a weighted average of the 5Y CDS (which represents credit risk) of these 30 names [see list below] where the higher the index, the greater the credit risk perceived… and the greater that credit risk, the more the concern. While the currrent level is certainly not in the critical zone, it is rising rapidly and is approaching key levels at which risk managers will begin to start evaluating CVA overlays.

A List of the 30 Most Systemically Critical Global Banks 

The table below is sorted worst to best in each geographical region. It is clearly evident that the geographic split is more concentrated in European entities than in the U.S. and Asia… A cursory glance [of the list] shows considerable dispersion [within] each geographical region… [ with U.S. based]… components averaging 131bps, [Canada’s Royal Bank of Canada is head and shoulders above the other 29 financial firms at a low 65bps.]… European components averaging 138bps, and Asian components averaging 126bps.

It would make sense that risk is elevated with:

  • China raising rates (and a housing bubble seemingly bursting),
  • Japanese stress from the vicious circle of the tsunami and macroeconomy spiralling with a weak demographic,
  • European banks clearly burdened by mismarked sovereign debt on their books, and
  • a US financial system that continues to practice extend-and-pretend all the time housing weighs heavy and TLGP debt must be refinanced.

The chart below shows that…systemic financial risk is not only rising in all 3 regions [and would show an even higher level for the North American line graph if the stellar performance of the Royal Bank of Canada was excluded from the calculation] but… is becoming more correlated – a factor that should be of great concern for both central bankers and risk managers attempting to mitigate any insolvencies. The apparent realization of an increasingly inter-linked and even bigger financial system  among credit market participants since the financial crisis is a signal not to be ignored.


We have not seen the increasing systemic financial risk being reflected in the typical measures such as Libor, OIS, etc. (which became so prevalent among the media during the crisis)…  [but the Index of Systemic Risk] is transaparent and offers a very clear market interpretation of the stress the global financial system is under. All too often, we have found the old agage that “credit anticipates and equity confirms” to be true.

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It will be important to keep a close eye on this financial stability index over the course of the summer…


Editor’s Note:

  • The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
  • Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Systemic Risk