miércoles, 18 de octubre de 2017

miércoles, octubre 18, 2017

The Global Stock Market’s Hidden Juice

Rising margin lending from Swiss and U.S. wealth managers can make a downturn far more painful

By Paul J. Davies


MARGING MAKERS
Loans secured against marketable securities




One common sign of trouble ahead is people borrowing heavily to buy equities.

Investors should be worried then that stocks are being supported by record amounts of margin debt, according to research released last week from the Bank for International Settlements, the Switzerland-based central bank for central banks.

These kinds of loans secured against stocks have often proved dangerous in a downturn because when share prices fall borrowers are forced to sell.

In the U.S., margin debt is more than three-times the level ahead of the 2008 crisis and is greater even than its peak in 2000 before the dot-com crash, according to the B.I.S.

However, lending volume alone isn’t a clear indicator of risk because equity values have increased, too. In the U.S. at least, lending as a share of market capitalization has been relatively steady for the past four years, most recently at 2.12%. But that level is much higher than the period before 2007 and above even the dotcom-era peak of 2.05%.

Swiss private banks, which have among the biggest and most international margin lending operations, have grown this business significantly. Credit Suisse has doubled its volume since 2006 to about $42 billion, while Julius Baer’s has grown by five-times to $24 billion, although it got a big boost from its takeover of Bank of America-Merrill Lynch’s international wealth business in 2013.



UBS with about $92 billion, has also seen strong growth, but an accounting change in 2012 makes it hard to say exactly how strong.

While overall growth appears to have slowed, that is partly due to a decline among Asian investors in 2015 and 2016, which is masking continued strength elsewhere.


RISK MARGIN
Total in U.S. stocks trading accounts, a negative number means they are in debt (2000-2017)



The Chinese market crash in 2015 shattered investor confidence across Asia, according to bankers. But while Asian lending went backward, U.S. loans continued to grow, including at Morgan Stanley , Bank of America Merrill Lynch and UBS’s American wealth arm.

Rich clients’ desire to borrow against stocks has been stoked by the low interest rates and rising stock markets. It is attractive for banks, too. Lending against shares is seen as less risky than mortgages because stocks can be sold more quickly than a house, so banks can hold less capital against margin loans. Also, if the borrowed money is invested with the bank, rather than spent on yachts or cars, that boosts assets under management.

STOCK IN HOCK
Margin lending at the New York Sock Excahnge as a share of market capitalization (1992-2017)



The banks themselves all say that while lending looks high, their own approach is conservative and the general competition for clients is less aggressive than in the past. But neither the banks nor their investors have a full view of leverage across the system and the risk that may pose.

Equities have to fall 20% to 30% before margin loans are underwater. That protects the banks, but doesn’t stop a wave of selling to repay debt when a downturn comes. That could spell real pain for everyone else.

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