Finance sector faces 'major crisis'
Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the burst of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report.
Revenue from investment banking may drop 20 percent in 2008 before a further $75 billion in markdowns, analysts led by Huw van Steenis said in a note to clients yesterday. Six quarters of earnings will have been erased by writedowns and falling revenue by this month, rivaling the collapse of the junk bond market at the end of the 1980s that put Drexel Burnham Lambert Inc out of business, the report said.
"The industry is facing the most severe investment banking crisis in 30 years," the analysts wrote in the report. "Global securities markets are in the midst of profound cyclical and structural change."
Banks' revenue from their credit businesses may drop as much as 60 percent, the analysts said, and the firms will have to provide more transparency to investors who buy their loans. At the same time, regulators will push the industry to retain more capital as a cushion, hurting banks' return on equity in the long-term, the group added.
Treasury Secretary Henry Paulson on Monday proposed the biggest overhaul of US financial rules since the Great Depression, saying the Federal Reserve should expand its oversight of financial services beyond banks.
Banks' earnings have been hit for the past three quarters by the turmoil in the credit markets, the report said. In total, the crisis may last for eight to 10 quarters, exceeding the six- quarter duration of the Asia crisis and bailout of LTCM in 1997-8, and the seven-quarter fallout from the bursting of the dot-com bubble, the report said.
Investment-banking revenue has also stalled as the pace of takeovers and initial public offerings declined in the first quarter of 2008.
Agencies
(China Daily 04/02/2008 page17)
