Credit Crunch !
2013-12-23
In past few days, interbank lending rates spiked up. 7 days rate cleared 9% briefly and 14 days rate is about north of 8% as well. Yield curve is ominously inverted. PBOC has injected 300 billion into the market, but entire financial market seems struggling with year end cash crunch. A persistent inverted curve would imply a recession ahead. However I would surmise that the free floating of lending rates since july by PBOC caught banks off guard and they are not simply ready to face a much more complex risk management issues, and they just hold cards to their chest and see what will be up next. The days of guaranteed money making for banks are numbered. They will find their powerful SOE clients will demand a lower funding rates. Margins will be inevitably squeezed. Structurally, interbank swap market is still far from being mature in terms of tenors and bid/ask spread. Many medium and smaller banks are left completely bewildered. Only the banks with superior risk management skills will survive. I would not be surprised that entire banking industry might see some major realignments down the road.
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