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Banking & Finance

Bank woes bode ill for world economy as talk of another global financial crisis gains traction

Bank of Japan’s decision to introduce negative interest rates, pay and hiring freezes at major lenders, and slower growth in China hit investor confidence

PUBLISHED : Friday, 12 February, 2016, 12:01am
UPDATED : Friday, 12 February, 2016, 12:00am

All is not well in the global financial sector. Worldwide lenders have come under increasing pressure from the recent market turbulence. Can this be a sign of another financial crisis brewing on the horizon? UBS, the Swiss banking giant, has announced a freeze on salaries for its 5,200 investment bankers until at least the middle of this year.

This came after HSBC told staff that a worldwide hiring freeze would be locked in place for this year, even though hiring in Hong Kong and the Pearl River Delta would continue. It had also planned to freeze pay but reversed that decision yesterday. Major brokerage firms in Hong Kong and the mainland are also freezing recruitment and even salaries.

The share prices of HSBC and Standard Chartered, two of Hong Kong’s note-issuing banks, have lost a third and three-quarters respectively in the past year and a half. Share prices of European and Japanese banks have taken a heavy beating so far this year, though the former recovered somewhat late this week.

READ MORE: Japan’s Abenomics seen failing badly as markets signal disillusion with missed targets

The Nikkei index has fallen more than 15 per cent so far this year as it has been hit by worries about dismal corporate earnings, China’s slowing growth and sliding crude oil prices.

Far from helping to buoy investors’ sentiment, the Bank of Japan’s surprise decision to push a key interest rate into negative territory has added to worries that this may be the last hurrah of Abenomics, which has so far failed to rekindle economic growth and reflate consumer prices.

Investors have been rattled by the idea of negative interest rates spreading across the developed world. The BoJ is just the latest to join the club of central banks that are pursuing negative interest rates. Warnings from US Federal Reserve chief Janet Yellen before Congress that global financial market turbulence – especially that from China – could slow growth and corporate hiring in the US, seem to confirm investors’ worries.

The last financial crisis was triggered by subprime mortgages and American financial groups that were overly exposed to them. Today, US banks and the American economy are ironically the rare bright spots in a world suffering from slow growth and being weighed down by heavy debts.

Troubled lenders with their earnings under heavy pressure are a direct reflection of the larger economic malaise that can be seen in Europe, Japan, China and much of the emerging market economies.

In 2008, banks were caught by surprise. This time, they may be the proverbial canary in the coal mine.