Global banking system not yet on solid footing
The world's banks are still not out of the woods despite recent multi-billion profits as writedowns on loans loom and funding pressures remain high, the Bank for International Settlements said.
Recent profits may not be sustainable given that of late they chiefly have been derived from trading income, the Basel-based BIS in its annual report published on Monday.
Banks also may face higher borrowing costs as they compete with governments to refinance debt, and many institutions are highly exposed to sovereign risk, the BIS said.
Despite the improvement to banks' balance sheets, several factors raise doubts about the sustainability of bank profits, the BIS said.
Banks like UBS , Morgan Stanley and Goldman Sachs posted strong earnings in the first three months of this year thanks to trading income.
A number of countries had to bail out banks at the height of the crisis to prevent the financial system from collapsing.
The BIS, often called the bank for central banks, has been pushing for tougher capital and liquidity requirements for banks to prevent a replay of the financial crisis, which pushed some countries into the worst recession since the 1930s.
The BIS said banks may face higher borrowing costs as they compete with governments for funding and because of flatter yield curves. More than 60 percent of banks' long-term debt flows would come due in the next three years, the BIS said.
Moreover, the BIS said not all crisis-related losses may be exposed yet as less stringent and less timely reporting requirements for banks in Europe had made it more difficult to gauge future writedowns. More writedowns could be expected due to falling commercial property prices, it said.
Losses on European bank balance sheets are expected to mount over the next few years, the BIS said. Anecdotal evidence suggests that some banks have taken to rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition.
The BIS also said that many banks in Europe and elsewhere were overly reliant on US dollar swaps. European and other banks had an estimated $7 trillion in dollar-denominated assets on their books, much of them with long-dated maturities.
(Reporting by Catherine Bosley; Editing by Toby Chopra)
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