Systemic risks that emerged before the 2007-2008 global financial crisis have emerged in most countries but very few monetary authorities do their job to avert the spread of the problem.
This is the observation of some leading critics abroad who predicted a financial crash is just around the corner occurring anytime this year or next.
They call the last wide scale financial crisis as “panic of 2008” that was never avoided because many central banks didn’t do their homework, said James Rickards in his recent column at Zero Hedge, one of the leading online publications in the US.
Observers said the crisis will begin when banks’ sub prime mortgages spread into debt obligations.
“I mentioned earlier, today systemic risk is more dangerous than ever,” he said.
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“Each crisis is bigger than the one before. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system, and have much larger derivatives books,” Rickards said in his column.
Rickards predicted that the next crisis could begin in the private bank debt market. The specific culprit is a kind of debt called “contingent convertible” debt or CoCos.
These bonds start out like ordinary debt, but a bank in distress could convert them to equity to improve its capital ratios.
The problem is that bondholders know this and start dumping the bonds before the bank can pull the trigger on the conversion clause. This can cause a run on the bank and trigger cross default clauses in other bonds.
Far from adding safety to bank capital structures, CoCos can make banks more unstable by igniting panics.
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