Bloomberg magazine has just penned a story underscoring broad concerns for the impact of the emerging market woes upon the health of the banking industry. The piece, written by Patrick Henry, points out that the UK stability outlook is now questioned on the back of this volatility and that the BOE is using its battery of stress tests to monitor any impact to the health of UK banks. The story can be reviewed at this link: http://www.bloomberg.com/news/articles/2015-09-25/boe-sees-challenging-outlook-for-u-k-banks-on-emerging-markets.
Using stress tests is a sensible idea given these pressures which can have complex and un-expected relationships with other variables. The bout of volatility we witnessed in August was in fact a real life stress upon the banking system, with sharply declining Chinese equity markets impacting global equity markets, debt markets (including credit market conditions of commodity trading players), and underlying commodity markets as well. Market conditions such as these underscore the risks of contagion which underscore the need for stress tests for the commercial banking industry. In another report issued by Deutsche Bank last month, emerging market loans outstanding held by a sample of large global banks was estimated at $1.7 trillion before adding in off balance sheet exposures (the numbers were higher pre crisis before banks like RBS, DB and others started to wind-down certain activities). In a third report in Euromoney magazine in September 2015, it is revealed that emerging market NPLs are nearly at a 25 year low after experiencing highs as recently as 2009/10, suggesting levels which may not be sustainable over the long run.
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