Banks across the world are more vulnerable to a crisis now than they were in the build up to the credit crunch, the World Economic Forum has warned.
Bad loans in India have more than doubled in the past two years, while in China’s financial system “business credit is building up similarly to the United States pre-crisis, and could be a new source of vulnerability. ”
China’s credit boom has been the subject of several warnings from global finance groups and regulators in recent months. Last week the Bank of International Settlements warned that higher interest rates in the US could have a knock on effect in the world’s second-largest economy, forcing rates higher in China, making the debt mountain more expensive to maintain and hitting the economy hard.
Britain, the US and other developed economies have taken major steps to shore up their banking systems as they were at the heart of the financial crisis, but the global financial system as a whole faces new and growing risks.
Other parts of the financial system are taking risks instead, such as fund managers in the so-called shadow banking sector. The eurozone banks have still not fully recovered from the crash either.
“In general, there is still too much debt in parts of the private sector, and top global banks are still ‘too big to fail’,” the WEF’s Global Competitiveness Report said.
“The largest 30 banks hold almost $43 trillion in assets, compared to less than $30 trillion in 2006, and concentration is continuing to increase in the US, China, and some European countries.
“In Europe, banks are still grappling with the consequences of 10 years of low growth and the enduring non-performance of loans in many countries.”
President Trump’s plans to cut back some of the post-crisis era regulation could also make the system less safe, the WEF said.
“This may lead to the re-emergence of fragilities that post-crisis regulation aimed to tackle,” the analysts warned.
Governments across the world are more indebted than they were a decade ago, making them less able to step in to bail out banks if they need to rescue the system.
Interest rates are also at very low levels across swathes of the global economy, meaning there is less room for central bankers to attempt to prop up growth in any future crisis.
Lenders in Africa and Latin America have not been as affected by a credit boom but are instead suffering the effects of falling commodities prices, as their economies are in part reliant on the sector.
A weak banking system is not only important because of the risks of another crunch taking place.
It is also damaging for global growth because banks are needed to finance innovation and investment.
Net investment in non-financial assets has failed to recover from the financial crisis and remains below its 2006 level of 1.5pc, the WEF said.
“The financial crisis impacted both traditional loans and venture capital availability, leading to a decade-long stagnation in total investments in non-financial assets,” the report said.
“Further development of Fourth Industrial Revolution technologies depends on sound foundations in the banking sector.”