Published 24 Nov 2023
Banking sectors in various countries have seen a tripling and quadrupling of balance sheets post GFC. This detailed report uses data from past episodes to describe various key issues that arise when private banks expand their balance sheets too much, and how economies become very susceptible not just to a rise in interest rates, but to unchanged interest rates at high levels for a period of time.
Central Banks allowed this balance sheet expansion to occur by focussing on Consumer Price Inflation, ignoring the rise in debt and the consequential Asset Price Inflation. What this reseacrh demonstrates is that seemingly robust bank balance sheet protections can evaporate in a very short space of time, leaving economies at risk of debt/deflation.
With various economies is such a state, the question arises about will happen to NPLs given that markets expect interest rates to remain high and unchanged for some time, unsurprising given recent Central Bank announcements.