Bank Crisis Smaller Threat to Economy in U.S. than in Other Countries
Despite the absolute size of the credit crisis in the US, it appears to present a much smaller threat to the overall economy than in many other countries, Floyd Norris points out in the New York Times.
The United States has a banking system that is the largest in the world but is small in relation to the national economy, Norris writes.
In the United States, the banks have total short-term debt that is equal to 15 percent of G.D.P. But in some countries where banking systems have grown to international proportions, the debt exceeds G.D.P. That is true in Switzerland, Belgium, Iceland and Britain.
Norris also looks at the short-term bank debt in relation to each country’s national debt. The relationship is not direct, because a country may have excellent credit that would enable it to borrow much more, but large numbers still raise questions.
“Can they guarantee the deposits if the bank owes 3.5 times the national debt?” asked Bob Prince, the co-chief investment officer of Bridgewater Associates, which provided the data.
Finally, the leverage ratio gives a rough indication of how risky a nation’s banking system might be. It is the ratio of total bank assets to the net worth of the bank. That could be misleading if the assets are very safe — government bonds, for example, versus subprime mortgage loans — but in general the higher the ratio the smaller the margin of safety.
There again, the United States appears to face a relatively small problem, with an average leverage ratio of 12. The figures range up to 52 in Germany. Theoretically, a 2 percent drop in the value of all German bank assets would wipe out the net worth of the banking system.
These figures will be meaningless if the governments retain the trust of depositors and creditors. “It becomes a matter of psychology,” Mr. Prince said. If governments say the deposits are safe “and the market believes them, then they don’t have to have any money to back up their promises.”
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