Banking: Before QE, After QE

In the previous article , he talked about the complications caused by the monetary policies of the developed country central banks after facing the global economic crisis and how the distribution of assets should be on the basis of the sector in terms of new portfolios and classical portfolio management. Today, we will examine its effects on banking in the classical sense.

The best thing you can do to save them in a crisis in 2008 when the crisis is in the financial sector and when your banks need to face the crisis is to keep their balance sheets liquid. From this point of view, the era of monetary expansion, which we can define as the strange part of economic history, was successful and kept the banks liquid. On the other hand, contrary to what is expected, its effect on the economy was limited. When the main purpose was to provide liquidity, banks and other financial institutions were encouraged to buy government bonds, not lending, which is their main activity.

While banks increased their weight in the balance sheets of liquid assets from good to good, interest continued to decrease. As interest rates fell, the gap between the average return of banks’ assets (loans, bonds) and the costs of their liabilities (deposits, borrowings) narrowed, and banks had to work with very low margins. The chart below shows how US banks’ net interest margins declined.

Another phenomenon that this situation revealed in the banking sector was to compensate for losses on the interest side with commission income. In a sense, this resulted in the fact that almost everyone who makes financial transactions is taxed.

Meanwhile, monetary expansion packages were announced one after another, which led both individuals and institutions to become more pessimistic. The central bank, trying to save billions of dollars and save the economy by increasing investments and consumption, decides to spill billions of dollars again when it fails to reach its targets, and this is repeated every two years. Indeed, how can you be optimistic about the economy?

Another step taken by the central banks for the banking sector was to increase the capital adequacy ratios. This led to a further decrease in the capital available to banks. However, banks lend to businesses and individuals with lower risk weighting, which basically include economic units that need the least amount of credit. Therefore, the move to develop the economy over the financial system was again interrupted. On top of that, we have seen that banks have started to focus solely on collateral rather than the bases of the borrower in their decision-making processes. Under normal circumstances, a credit analyst needs to test the repayment capability of the loan company, but only collateral valuation was performed. If the project in question fails, you cannot expect that collateral to recover, you have not already run a valuation process for the project itself. We can say that the loans extended to the sector in the USA, especially due to the declining energy commodity prices, led to a tendency to deteriorate an asset quality, even if it is not major in the banking system.

Is it that banks’ risk appetite is so low for the financial system? It’s not really like it. Because we see many innovative ideas emerging, such as peer-to-peer lending, crowdfunding. There is an example of LendingClub in the US today, though it faces serious corporate problems. Again, we see that many initiatives have emerged in Europe and the digital banking area has achieved significant growth momentum. Time will show whether the “creative destruction” that we mentioned in the previous article and which we see as the emancipation of the economy will also occur here and cause a radical change in banking.

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