Finance

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Big banks were a safe haven in a perfect storm.

In the past seven years, financial companies have more than doubled the amount of their dollar-denominated debt outstanding, including a growing chunk of securities that could buffer banks against losses should their reserves dwindle. All the while, they paid a shrinking fee for the privilege, with yields on their notes falling to a record low 2.3 percent in 2013.

debt-outstanding

Investors seemed more than happy to lend to them -- after all, banks were becoming less risky, and everyone seemed to want to buy corporate debt in the wake of monetary easing by central banks.

Times have changed. The lowest-ranked financial-company debt is poised for the worst start to the year since 2009, with so-called contingent convertible capital notes losing more than 5 percent so far this year. Credit concerns are mounting in the face of slower global growth and potential losses on loans to Chinese and commodities companies.

debt-outstanding-2

So, are we seeing the start of another financial crisis, similar to what happened in 2008? Unlikely. Instead, the recent jitters demonstrate that investors are confronting a new era in which central banks have less control over markets and banks are more vulnerable than they once seemed. Investors want to earn more to give their money to a bank. They're suddenly worried about all the risks they had forgotten about during years of financial stimulus.

Don't Bank On It
Stock price for banks with the greatest year-to-date drop in CoCos.
Source: Bank of America Merrill Lynch index data

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Rani Molla in New York at rmolla2@bloomberg.net
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net