>How have the banks reacted since the crisis? An analysis of their balance sheets (NATIXIS)

The crisis was sparked by the decline in bank lending, due to excess indebtedness among borrowers followed by a halt in the supply of credit by the banks when their funding sources (interbank and bond market) dried up.

Today, the deleveraging is continuing (in the United States, the euro zone and the United Kingdom), mainly due to the permanent decline in credit demand. Banking liquidity has been restored due to the very expansionary policies (direct financing of the banks) implemented by central banks.

In this environment, what is the banks’ behaviour?

− they are accumulating massive excess reserves, which earn very low interest rates, and this means that they are de facto abstaining from more profitable uses of their short-term funds. This reflects either a lack of possibilities to invest or lend, or a determination to reduce the risks taken;

− they have increased their equity capital sharply, mainly at the request of the regulators;

− but they are also massively (above all in Europe) net buyers of bonds (above all government bonds), and these purchases are financed in the short term market. This has restored their profitability, thanks to the positive slope of the yield curves, but means that while they have reduced the credit risk drastically, the banks have also increased the interest rate risk (transformation risk) drastically.

Besides, this probably corresponds to what the regulators want. It is therefore surprising to see, simultaneously, in the banks' balance sheets signs of high risk aversion (cash reserves, high equity, reduction in credit and liquidity risk) but at the same time signs of lack of aversion for interest rate risk (duration risk).

To read the full report: ANALYSIS OF BALANCE SHEETS