Investment Contrarians

U.S. Recession

Global Recession Will Follow Global Lending Contraction

By for Investment Contrarians | Jun 18, 2012

After the financial crisis hit in 2008, a banking supervisory committee was established to minimize credit risk around the globe: the Basel Committee on Banking Supervision.

The problem is that the latest set of regulations—Basel III—could cause what the committee was established to prevent: another financial crisis.

Basel III is forcing big banks internationally to raise their core tier-one capital ratios. This means big banks must have a larger amount of specific capital in place to cover all of their assets.

In order for big banks to meet this standard, they must sell other non-tier-one assets and/or reduce lending. The Basel Committee estimates that this will reduce global gross domestic product (GDP) growth by a fractional amount.

It looks like the Basel Committee is underestimating the impact of Basel III on the big banks and GDP growth.

The Bank of International Settlements (BIS) is an institution created by the central banks around the world. The BIS essentially is a bank for all of the world’s central banks, the aim of which is to foster financial and monetary stability globally.

The BIS has released its latest report on credit lending among the big banks. It found that lending among the big banks in the south of Europe is contracting at a very rapid rate, as these big banks try desperately to meet the Basel III standards. The biggest drop-off in lending occurred among the big banks of Italy and Spain, which means these economies are the most vulnerable to significant contraction in 2012.

With economic growth worldwide struggling to find some kind of footing, a reduction in credit growth means that … Read More