Financial monitor sees limited subprime fallout
LONDON: The market fallout from the subprime mortgage slump is less severe than in 1998 after Russias default and the collapse of Long-Term Capital Management, the Bank for International Settlements said Monday.
The assessment from the international bank, which monitors financial markets for central banks and regulates lenders, contrasts with an analysis from Standard Poors, which said last week that the outlook for securities firms was worse than in 1998.
“Some investors began to draw parallels with the autumn of 1998, when the collapse of LTCM had triggered fears of instability in the banking system as a whole,” the bank, based in Basel, Switzerland, said in a report. “However, the recent rise in U.S. 10-year swap spreads was less sharp than at the time of the LTCM crisis.”
Investors are demanding a yield premium over 10-year Treasury notes of 70 basis points to swap floating interest rate payments for fixed, up from 54 basis points in May. In 1998, the premium, which increases as the perception of risk deteriorates, had more than doubled to 97 basis points.
Bank stocks dropped as much 17 percent this year, half the 35 percent decline in 1998, according to the Standard Poors Banks Index.
Declines in stock markets “largely reflected investors anticipation of losses related to speculation in the subprime market and other credit products, as well as expected declines in bank profits due to lower MA-generated fees,” the BIS said. “Despite such losses, the overall decline amongst U.S. banks had not by late August been as severe as in 1998.”
SP, based in New York, said last week that revenue from investment banking and trading might fall 47 percent in the final six months, compared with a 31 percent decline nine years ago. Moodys Investors Service has said that a hedge fund collapse on the same scale as LTCM was possible.
“It could be a pretty tough couple of quarters for investment banks,” Nick Hill, an analyst at Standard Poors in London, said during an interview.
