[ccebook.cn]The World in 2010

Finance
Ups and downs
Nov 13th 2009
The gap between weak and strong banks will grow ever wider in 2010
The financial crisis, like any good rollercoaster, started with a giddying ascent and a terrifying plunge. The ride
is now slowing to a stop but 2010 will still produce some nasty moments for the banks.
First, the less-bad news. Rates of unemployment, corporate defaults and consumer delinquencies will have
passed their peak in most countries by the end of 2010. House prices will have bottomed out in America, the
place where it all began: national prices will at last hit a trough some 35-40% below their 2006 peak. Interest
rates will remain extremely low, helping overstretched borrowers to meet payments and to refinance loans.
Reviving economic activity will buoy transaction volumes at wholesale banks (although profit margins will come
down from the extraordinary levels of mid-2009).
This slow turning of the credit cycle will not be enough to save some banks from being overwhelmed by
losses. The first chapters of the financial crisis hit investment banks disproportionately hard; the closing ones
will focus on commercial banks. Commercial property will remain the biggest single headache for many banks,
particularly smaller lenders exposed to developers in depressed areas. The cull of smaller American banks will
continue. The gloomiest estimates reckon that more than a thousand tiddlers will fail as a result of the crisis,
many in 2010.
If survival is no longer the question facing bigger banks, three sources of misery will still weigh down the
industry in 2010. The first will be the weakness of economic recovery, at least in the developed world. Higher
savings rates will dampen demand for credit, both directly and indirectly. Various government stimulus
programmes will be withdrawn during the course of 2010—one of the biggest, the Federal Reserve’s purchases
of mortgage-backed securities, is due to disappear early in the year. Housing markets will be weighed down
by continuing foreclosures and the threat of another supply glut, as more homeowners are tempted to put
their houses back on the market.
The second source of concern for the banks will be the fragility of their balance-sheets. Governments’ debtguarantee
programmes are being phased out, which means that banks will have to pay more for funding. And
although capital levels are better than before, the quality of the loans and securities that banks hold is still
unclear. Plans to transfer the most toxic assets from the banks have fizzled in many places. Some lenders
have taken advantage of changes in accounting rules to reclassify trading assets as banking assets, which
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