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The worrying story for markets this morning could be one person’s view that we’re on the possible verge of a banking crisis. That's a big call, so I went looking for evidence.

Not another banking crisis! I don't want to believe it!

Peter Switzer
29 July 2016

By Peter Switzer

The worrying story for markets this morning could be one person’s view that we’re on the possible verge of a banking crisis. That’s what The SMH has put out there to scare the pants off its readers but I held on to my duds and went looking for evidence that this is a real threat, or just another scare tactic from the media.

The media can get up to such tricks you know.

So I went to see what Wall Street did overnight and I saw the Dow was down 15.83 points, while the S&P 500 index was up 3.48. So there was nothing to see there. In fact, the 10-year bond yield was higher, which is a good sign that panic is not on the rise.

Also, the Fed again left rates on hold and gave few signs of when it would lift rates but, as I say, there was no sign of pre-bank crisis anxiety.

The SMH piece actually comes from Bloomberg and its editorial committee made the point that it doesn’t necessarily agree with its writer — Satyajit Das.

He punts on a potential disaster as Europe awaits bank stress tests. Our disaster watcher adds to our stress in writing this: “the world could be on the verge of another banking crisis.”

That’s a big call and I’m praying that Mr. Das is either a sensationalist or a nincompoop, because we simply don’t need another banking crisis.

According to our ‘esteemed’ bank watcher, “the signs are obvious to all”, though Wall Street’s hoards of investors, hedge funds and smarties have missed it overnight!

“The World Bank estimates the ratio of non-performing loans to total gross loans in 2015 reached 4.3%. Before the 2009 global financial crisis, they stood at 4.2%,” he reports.

I have to say our economic horror story writer has collected a lot of scary stuff, such as $4 trillion worth of stressed loans worldwide and Europe has $US1.3 trillion of non-performing loans, with $400 billion coming from the banks of Italy. And at the heart of the Italian banks balls up is the world’s oldest bank — Monte dei Paschi de Siena.

Also, a lot of banks are exposed to the resources sector, which Mr Das calls “troubled”. And the sector has been, but things have got a tad brighter recently, partly explaining why our stock market is up about 18% since February and why Wall Street is in record high territory.

To see if this scare story was being shared in Europe overnight, I checked out stock markets there. The German DAX was down 0.43%, the French CAC was off 0.59% but the Spanish IBEX was down a big 2.10%.

However, big European banks, such as Credit Suisse, reported a surprise attractive profit and BNP Paribas beat expectations. No smoking gun was detected, thankfully. However, their respective share prices were down, which does worry me a bit.

That said, the tests are out tomorrow. Looking for a more optimistic take on the possible results, I liked this from Alan Adkins of credit ratings agency, Fitch: “"We expect the more highly rated banks will show resilience.”

My view is that if these stress tests are set to be shockers, then credit ratings agencies and smarties or insider traders would have been smashing bank stocks this week.

I really hope insiders have formed an opinion on European banks and I hope they hold a different view to Mr Das.

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