aside from bank runs,what factors could bring about cross cascading bank defaults?greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Scary Gary's favoite boogaloo after infra structure failure is cross-cascading bank defaults.Could computers alone cause them?Or is investor panic required.Inquiring doomers want to know!!
-- zoobie (firstname.lastname@example.org), October 31, 1999
Billions and more billions of foreign loans in those 'other' countries made by big banks in this country.
-- snooze button (email@example.com), October 31, 1999.
A 50% reduction in oil refining capacity outa do the trick.
Just don't see myself driv'n much next year. :(
-- Nailbender (firstname.lastname@example.org), October 31, 1999.
Bank-tobank problems: Herstatt Risk (from 1974)
"the turd in the Y2K punchbowl..."
Multi-trillion dollar threat posed by Herstatt risk
Recent research highlights the largest Y2K risk threatening institutional banks at the international level. The threat could be on the order of trillions of dollars.
Sept. 29, 1999 --
Most large banks have addressed Y2K compliance and feel relatively secure about their internal systems and controls. There are, however, significant Y2K threats posed to institutional banking outside of the normal operational control of banks.
Retail threats such as deposit runs are being handled by national central banks and regulatory authorities to varying degrees. Institutional banking and trading face different and potentially more significant threats.
International Monitoring, has released a 44 page paper highlighting 5 risk areas for institutional banks.
An excerpt from the paper follows:
Recently, a risk analyst passed on the following anecdote from a conference for senior bankers and traders.
A senior banker was explaining the benefits of his firms new risk management system.
Another senior banker nodded and acknowledged the cost and sophistication of the effort.
The first banker summed up his position by stating that,"Y2K is a small risk relative to the day to day running of the bank. "
The second banker replied, "Thats ironic, Ive heard that Herstatt risk could be the real turd, in the Y2K punchbowl."
This colourful phrase piqued our interest. Herstatt risk is rare, indeed, so rare that most bankers dont know the term.
The term, is derived from a single event, occurring in 1974, which after the closure of a German bank. This piece of economic trivia could become relevant in the coming months. Our estimates indicate Herstatt risk may be the most significant Y2K risk faced by the international banking system.........
-- Nelson Isada (email@example.com), October 31, 1999.
It wouldn't take a huge event to cause problems with JIT inventory control. My druggist says he has a three day supply of pharmaceuticals and orders at the end of every day. His computer automatically places his orders with different firms. Carlos confirmed that this is a normal procedure in pharmacies. Carrying more inventory is prohibited by the costs involved.
So figure, if there is a slowdown in deliveries it will not take long before some people will have to wait for their meds. Not too much longer, and some may very well face life-threatening delays.
If you factor in a bad flu season, or a biological terrorist attack, the shortages could become *very* disruptive. This is all hypothetical at this point, but certainly seems possible.
Little things we would never notice might become big events if a bunch of them start happening in a short period of time and as a group increase the effect of each one.
-- gene (firstname.lastname@example.org), October 31, 1999.
One of the likeliest, but least discussed reasons for a banks failure lies in the customer telephone communication system. All banks will have at least small problems at/after the rollover, and the bank will expect us to resolve these small problems over the telephone.
But after listening to "Waltz of the Flowers" 324 times over three days, most customers will get sticks, go to the bank and beat the bank people to death. And that is how it will start.
-- dave (email@example.com), October 31, 1999.
Cross cascading telecommunications defaults would do it. Even it was only those guys in those other countries.
-- Shelia (Shelia@active-stream.com), October 31, 1999.
Will someone here please explain Herstatt risk, other than to say it's the TITPB? It's been driving me crazy, seeing this reference to H-Risk all other the place. Okay, so they were a German bank that closed in 1974. What happened to them? Why did they have to close? Tha
-- CD (CDOKeefe@aol.com), October 31, 1999.
Herstatt Risk to Banks
-- (?@!.?), October 31, 1999.
Short answer is bank A receives a deposit for a client from bank B, accepts and credits the funds to tghe client who withdraws it. the only problem is that Bank A closes before the funds clear.
Bank b needs to get them back from the client and ....
think about the ramifications....
-- Chuck, a night driver (firstname.lastname@example.org), October 31, 1999.
A really fast plunge in the value of paper assets, combined with the mostly bullish derivitives positions of the major US banks, will no doubt help the CC-D scenario along.
But if this don't do it, something else will, (or, the combination of the lot of it will. I think it will... I guess I'm a dooomer, and not necessarily happy about it.)
-- number six. (Iam_not_a_number@hotmail.com), November 01, 1999.
Cross-cascading defaults can occur more ways than depositors making a run on a bank, or computer problems.
The banking industry is a major player in the derivatives markets. All it would take to disrupt this entire marketplace, would be for the banking industry to begin closing out positions and retreating to the sidelines to see what happens to market confidence as we approach and pass through the Roll-Over. This flight of capital from the derivatives market would affect all underlying markets from which derivatives positions derive their value. As with the stock market, not everyone can make it through the exit door at once. Thus I consider the banking industry could precipitate a liquidity crunch or flight from this market all by its paranoid self.
If even a few banks got caught in bad/losing derivatives positions, their illiquidity would then affect any banks having dealings with them. This could trigger the cc-d folks are concerned about.
A second way threat to banking liquidity and leading to cascading defaults would be the very ignored issue of their loan portfolios. Banks may well be able to write off bad loans to a point. The million dollar question is how much unemployment from y2k disruptions would come back to erode banks' income stream--LOAN PAYMENTS. Loan defaults in sizeable numbers, whether personal, auto, home-equity, first mortgage, etc. cannot occur without having huge repercussions upon a bank's ability to continue earning income. Whether a bank would foreclose, or simply let non-payment go in the shortterm(at the behest of the government),THEY LOSE THIS INCOME.(And insurers cannot meet massive claims/and liquidations of massive foreclosed property would depress many markets such as real estate.)
This could cause a number of banks to become insolvent and trigger the cascading as they all have dealings with each other.
Finally, creditworthiness is a BIG issue. What banking loan committee will blindly make standard NEW loans in such a brittle enviornment? If a bank gets an application from a chemical plant worker, and chemical plants are in disruption from their own y2k problems, would it be so far-fetched to think that a bank loan committee would deem the applicant's future income to be "iffy"?? Loan denied! Again, banks have and always will deny certain loans. But, the milliondollar question again is Who should they loan to? They cannot suspend making new loans forever. If there are interrupted income streams with existing loans, and a very low rate of new loans, then banking revenues are again reduced. Not every bank can whether such a drought Once one or two are in trouble, then whoever they deal with is affected as well.
There are many other repercussions from the above examples, than I've cited. But, you should get the interrelated nightmare picture.
For anyone to say that banks are not vulnerable from EVERY quarter be it derivatives markets, cascading cross-defaults, bankrupt or defaulting in current loan portfolios, lack of enough credit-worthy new loans, withdrawls by depositors, simply isn't looking at the entire picture. (And this is DOMESTIC, only; think of International possibilities for problems!)
This single industry is in for the most uncertain of times in quite some time. To fall for the simpleton approach that its biggest threat is depositors withdrawing money is laughable to me. In the end, bankers will panic and tighten lending ALOT, tolerate late payments less and less, try and get THEIR bank out of derivatives before a competitor bank beats 'em to it,etc.etc. This dog-eat-dog scenario is the greatest y2k threat to banking. Bankers will have much less confidence in each other. They will also have less confidence toward the public they lend to. If you think about these things, you should see BIG problems ahead. I cannot fathom how anyone could think y2k will not change this industry in in quick and dramatic fashion, can you?
He Who Rolls with Punches
-- Rolls with Punches (JoeZi@aol.com), November 04, 1999.