Capital Gold Group Report: Money Pros Expect Another Big Financial Firm Collapse

By ALINE van DUYN, Financial Times

posted: 3 HOURS 4 MINUTES AGO

(Aug. 12) - Institutional investors expect another big financial firm will collapse within the next six months in the continued fallout from the credit crunch, new research has shown.

Nearly 60 percent of U.S. and European institutional investors surveyed by Greenwich Associates believe there will be a failure in the next six months. Another 15 percent think it will happen in 6-12 months.

The investors feared that the knock-on effects of collapse of a big institution on the credit derivatives market would pose a "serious threat" to global markets.

"Most institutions think we are currently in the most dangerous period for global financial services firms," said Frank Feenstra, a consultant at Greenwich Associates. "Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside."

The survey of 146 institutions by Greenwich Associates, to be published this week, included banks, hedge funds, investment managers, mutual funds and pensions funds in the United States, Canada and Europe.

Concerns about "counterparty risks," where exposure through derivatives or other securities to a failed bank or investor can lead to a chain reaction of collapse, led the US Federal Reserve to push for a rescue of Bear Stearns  in March.

Central banks and regulators, led by the Fed, are pushing dealers to take steps to reduce the systemic risks around credit derivatives, a sector which has ballooned to $62 trillion in outstanding contracts in just a few years.

The Greenwich survey found that 55 percent of respondents had stopped using one or more financial institutions, other than Bear Stearns, as a counterparty on credit trades due to concerns about solvency, although it did not name them. Many had cut back their use of credit default swaps, the most common type of credit derivative.

U.S. institutions which took part in the survey were the most concerned about counterparty risks in the credit derivatives market. Greenwich said 85 percent regard it as a serious threat, compared with 55 percent of European investors.

Nearly 80 percent of institutions said banks had tightened margins or collateral requirements in the past year.

Banks and dealers in the credit derivatives market have told the Federal Reserve Bank of New York  they will meet new targets to reduce risks. These include the introduction of a central clearinghouse by the end of the year, a move that could require billions of dollars of new capital.

The Greenwich survey found that 75 percent of institutions thought such a clearinghouse would mitigate counterparty risks. However, 60 percent said they would prefer one backed by exchanges rather than sponsored by banks.

Concerns about banks' financial strength continues to be reflected in elevated short-term funding costs that banks face.

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