The Perfect Storm

Is the banking industry or for that matter the planet in the middle of a “perfect storm”?

By perfect storm I mean “a critical or disastrous situation created by a powerful concurrence of factors”.

So what are these factors and how do they concur to provide a mess?

First of all we have signs of a dot.com bubble version 2.0. Last week’s flotation of LinkedIn provided evidence of inflated market prices paid for a database! We have seen this before in the early noughties. Clearly some investors are getting rich very quickly with little capital at risk creating a feel good factor that may be misplaced if one looks at other concurrent elements.

The world’s banks continue to face the prospect of crippling losses if certain countries default. Greece is said by some commentators to be insolvent. The realisation of this phenomenon could lead to a domino effect causing debt servicing issues in Spain and maybe even Italy (a country further crippled by a dysfunctional government and low growth).

As if this wasn’t enough there is no talk of certain countries exiting the euro causing extreme pressure on one of the planet’s reserve stores of wealth with consequential disruption.

Banks continue to suffer from an overhang of commercial property assets whose value is depressed. These assets and related loans sit on good bank balance sheets, on bad bank balance sheet, offshore with hedge funds and, I suspect, in cupboards yet to disclose their skeletons.

The guardians of the financial system remain locked in a naval-gazing phase. Legislators argue with regulators in the United States as to how to implement Dodds Frank or whether to implement it at all. The UK’s FSA is busy on cutting itself into at least two if not three pieces. Europe’s legislators and regulators fight for the right to influence regulation. The IMF – well let’s not intrude on private grief.

Maybe I am being alarmist but I sense a very real possibility that all of these factors will concur to create a storm that challenges the credit crunch in its ferocity.

Does your organisation have mechanisms to detect such a storm and to navigate your way around it?

These mechanisms sit somewhere close to your stress testing / scenario analytical processes.

How robust and developed are these processes?

If you would like to engage in a debate as to what “good” looks like in this world please e-mail me at [email protected] and let’s continue the discussion.