The key chart
(Source: BIS; CMMP)
The key message
How exposed are banking sectors to elevated private sector debt risks in Sweden, France, Korea, China and Canada?
Recall that these five economies have private sector debt ratios that exceed the “peak-bubble” level seen in Japan in 4Q94 and debt service ratios that are not only high in absolute terms but are also elevated in relation to their respective 10-year, average affordability levels. Twin warning signs.
The banking sectors in China and Korea have the highest exposures to elevated private sector debt risks among this sample (see key chart above):
- China: bank credit accounts for 84% of total private sector credit and the bank credit ratio of 184% GDP exceeds the peak-Spanish bank credit ratio of 168% GDP;
- Korea: bank credit accounts for 73% of total private sector credit. The bank credit ratio of 161% GDP is slightly below the peak-Spain level but well above the peak-Japan level of 112%.
(Source: BIS; CMMP)
In contrast, risks in Sweden, France and Canada are shared more equally between banks and investors (see chart above). Bank sector credit accounts for 51%, 50% and 49% of total private sector credit in Sweden, Canada and France respectively (reflecting the greater development of alternative sources of credit in advanced economies).
This does not mean that banks are not exposed, however. The bank credit ratio in Sweden is 138% GDP, above the peak-Japan level. In France and Canada these ratios are the same or slightly below the peak-Japan level (112% GDP and 109% GDP respectively).
In short, risks remain real and elevated. In a world, that sees public sector debt as a problem but largely ignores private sector debt, this matters, or at least it should do…
Please note that the comments and charts above are abstracts from more detailed research that is available separately.