Boaz Shoshan here, I’m back again. I took a brief holiday home to Aberdeen for the BrewDog AGM, but have now returned to the southern English sunshine.
I was hoping to “decompress” and keep my mind off work while I was away. And while the beers at the AGM certainly helped in that regard – some were approaching 20% ABV – I was ultimately unsuccessful: during my stay I ended up speaking to my friends about Cold War II, and to my family about risks in the financial system.
These days “credit” refers to debt, and “credit risk” means the risk of not getting your money back. But credit still retains its original Latin meaning too: trust.
When trust in the financial system breaks down, everybody connected to it is in deep water. Banks need to borrow from each other, but can’t. And when banks can’t get funding, can’t get credit, the entire system seizes up. This is what happened ten years ago, and is why the global financial crisis, or GFC, had a better name back then: the credit crisis.
Large financial institutions underestimated the credit risk in US housing in 2007. When those mortgages blew up in 2008, those institutions did too. And distrust, deadly to a credit system, leaked in.
Connected through a web of loans and derivatives, losses spread like wildfire. As a result, banks stopped believe each other’s claims that they were solvent, and stopped extending credit to one another. But inter-bank lending is vital for a credit system to function. And so the entire system came to a halt.
During a credit crisis, you don’t want to be holding anything that is someone else’s liability. Bank and trading accounts may be frozen, or given a “haircut” as part of a “bail-in”…
You’ll not only know what to look out for the next time the financial grim reaper comes to town, but we’ll also share a couple of our ideas for “unplugging” wealth from the financial system – information we normally charge for…
Until tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates