As in the everyday lives, in the economics and finance a misfortune never comes alone.
The genesis of the economic crisis caused by the irrational expectations of the economic agents has been aggravated by the financial system. The Bulgarian banks, in parallel with their foreign counterparts, stimulated exuberant expectations of a narrow range of economic sectors, achieving impressive levels of industry concentration. A significant portion of the credit exposures are to capital-intensive sectors with little if any value added, which, although regulatory different, is in fact equivalent to financing the acquisition of tangible fixed assets. At present, the boomerang of the irrational credit boost returns in the courtyard of the banking system dressed in bad loans.
By analyzing the interest rate levels many borrowers and analysts remain with the initial impression that banks pile up huge profits from interest rate spreads. Despite its seemingly good capitalization and hardly secured liquidity, the banking system has generated almost threefold increase in bad credit exposures for the first three quarters of 2009. The former, after provisioning, reflects extremely negatively on the performance of banking system.
The higher risk levels, the economy vulnerability, the businesses and financial system recession fears, supplemented by the over-reaction of the financial regulators on liquidity and capital adequacy issues, may push the global economy into a global liquidity trap. Facing serious issues with new revenue generation, reaching an endogenous limit for liability increase and reporting swelling classified exposures in the loan portfolios, I personally expect banks to continue to report deterioration in their portfolios until the prices of assets serving as collateral become attractive to investors in distressed assets.
10 December, 2009
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