Bankers Are Sitting on a Vast Mountain of Risky Trades
Everybody's worried about bad loans, but what about the hundreds of billions of dollars of Level 2 and Level 3 assets held by the biggest banks?
A daunting size.
Photographer: Adams/Hulton ArchiveBanks insist they’re in much better shape than they were during the run-up to the 2008 financial crisis. This time, as the coronavirus lockdowns wreck output, lenders can be “doctors of the economy,” in the words of one industry executive. True, banks have much larger capital buffers and better access to funding than was the case 12 years ago. How smart they've been at running their trading businesses remains to be seen.
Some of Europe’s biggest banks have gone into the worst economic contraction since the Second World War sitting on huge piles of complex, risky trades whose fair value is hard to determine. These are the so-called Level 2 and Level 3 assets, the types of instruments that blew up in 2008.