Is It Time to Trust the Global Financial System Again?
It’s been more than five years since the financial system entered meltdown mode and wreaked havoc on asset classes around the world. In response to the crisis, central banks around the globe pumped liquidity into the system at an unprecedented pace. Progress has been made in terms of price appreciation, but is trust coming back to the financial industry?
Despite a significant rebound in equity markets, trust sentiment is still in negative territory. According to the Trust Index from Thomson Reuters, trust in the top 50 global financials based on market capitalization came in at -1.75 percent in the fourth quarter, higher than where it stood at the beginning of 2013 but still below -1 percent seen in January 2012. The highest amount of trust is among the 12 institutions in Europe and the United Kingdom, at -1.25 percent, while the 19 institutions in the Americas scored the lowest, at -1.85 percent.
The sentiment scores are very sensitive to industry events, macroeconomic developments, and policy decisions made by central banks. In the final months of 2013, bank fines related to the housing bubble and LIBOR scandal weighed on trust. Making matters worse, the U.S. government enacted a partial shutdown for the first time in nearly two decades.
“Throughout a year which saw dramatic improvement in markets and economies (and numerous headline events impacting the top 50 global financial institutions), trust sentiment amongst news and social media, whilst still modestly negative, had recovered from 2012’s lows and stabilized, and the analyst community continued their strong assessment of the sector’s prospects,” said David Craig, president of the Financial & Risk business at Thomson Reuters. “By year end, our data revealed a stronger industry had passed the five-year anniversary of 2008’s crisis and looked ahead to 2014 within a much-changed landscape and an ever-increasing regulatory burden.”
Although American banks suffered the worst trust sentiment scores, the largest players on Wall Street recently reported near-record profits. Together, JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) generated $76 billion in profit last year, more than any year since 2006. In fact, that milestone was hit even though these six banks paid almost $19 billion in fines.
Spreads on credit default swaps — insurance against default — are indicating that confidence is coming back to the financial sector. As the chart below shows, CDS spreads remain in a multiyear downtrend, with American institutions leading the way. The average spread for the top 50 global financials ended 2013 at about 103 basis points, well below the high of nearly 350 in 2011.
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