Banking Sector

Economy Backbone

It is easy for newcomers on the stock market floor to forget the horrors of Economic Depression, because the last decades have been fortunately free of the worst of them. Nevertheless, the crude oil price trend, rising government deficits, and uncertainties on the world political front, expose many countries to run away inflation, reduction of purchasing power on the parts of large numbers of people, and a progressive loss of confidence.

The first victims of a major Depression are banks. Many of them in countries such as India and China are substantially owned by national governments. They may not fail in the conventional sense of the term, but their private and minority share holders are still affected in trying times. Stock market sentiment is also deeply affected by poor financial performance of banks. The ones controlled and owned by governments tend to hide enormous inefficiencies, are often over-staffed, and may be forced to lend on commercially infeasible terms.

Retail banking appears attractive for banks widely held on the stock market, but the business requires enormous investments in advertising, is always under margin pressure, and runs risks of poor recoveries during economic down turns. Again, poor performance in some sectors may be disguised in the financial reports available for stock market investors. This does not matter much in good times, but can result in shocking capital losses during the early phases of a major Depression.

Nothing is Worse for Stock Market Sentiment Than a Bank Failure!

Basel II is a clear sign that many banks may be unduly aggressive in their operations. The guidelines should not have been necessary had the original Basel Convention recommendations been duly and universally followed. A matter for particular stock market worry is that banks make no declarations about whether they observe the Basel II norms.

Private Banks in the United States are especially risky from a stock market perspective, because they have openly refused to support the Basel Convention fully. It may be worthwhile for stock market investors to support them in the short term while the economy does well, but they should be the first stocks to put on the block every time there are signs of a slow down in citizen confidence.

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