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US financials are melting on Monday:
As at pixel time, we’re facing a broad-based sell-off but the banks are among the hardest hit.
However, Goldman Sachs, appropriately enough, reckons this will be a short-term soft patch. In a note out on Monday the house argues that although there has been a 10 per cent slide in banks stocks in the last week, this is not 2008 all over again.
Phew.
Goldman cites the better positions of bank balance sheets now compared with three years ago — higher liquidity, “almost no reliance on short-term funding”, improved capital and limited leveraged loss exposure.
Fair points but to argue that “the liquidity freeze in late 2008 was driven by fears over the level of bank capital,” is using Ockham’s razor a little too violently. And this forecast is casually dropped in:
Credit spreads wider but cost of debt stable Term debt market remains open and there are no real concerns with the ability of banks to complete funding. However, ratings downgrades are increasingly likely for the major US banks as the agencies continue to review the amount of government support factored into debt ratings.
To be fair to Goldman, that’s not new news — S&P have been warning of the impact of the removal of government support for months now. The real worry, as FT Alphaville has pointed out, lies in the repo markets. Goldman argue that there’s nothing to see here but, in case you need a quick checklist, this is what its banks team is monitoring in the days and weeks ahead:
After the US credit rating downgrade, we are monitoring several key indicators to assess the impact on both the broader market and bank stocks, including (1) LIBOR-OIS spreads, (2) CD pricing, (3) changes to haircuts for treasuries/agencies in the repo market, (4) a widening of spreads in the credit markets, (5) the overall CP market, and (6) downgrades of municipalities. We believe these indicators will help assess the overall impact of the downgrade.
On Monday, however, it remains all eyes on Bank of America.
Related link: Why money market fund actions will be key – FT Alphaville
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