Financial counterparties have experienced widespread deterioration, according to the latest Credit Benchmark consensus data.
Banks of all types have seen their credit quality decline. The largest shift was with Latin American banks, as seen by a 14:1 ratio showing far more deterioration than improvement. North American banks and G-SIBs were the next most negatively affected with ratios of 4:1 each. Last month’s worst performing category, APAC banks, saw the least deterioration this month but the ratio was still tilted towards downgrades at 1.7:1.
Intermediaries performed a little better. The brief respite enjoyed by Prime Brokers last month is over, with this category’s ratio now at 5:1 deteriorating to improving. Custodians and Sub Custodians, Broker Dealers, and CCP Members showed ratios of 3:1, 2.5:1, and 2.1:1, respectively, and this comes on top of previous deterioration. Only CCPs themselves were unchanged this month.
The buy side shows a mixed picture. Ratios for Sovereign Wealth Funds and Insurance firms had ratios of 3:1 and 1.5:1 deteriorating to improving respectively, while Pension Funds and Mutual Funds saw more improvement than deterioration and were at a ratio of 0.6:1 each.
According to David Carruthers, Head of Research at Credit Benchmark:
“The latest update shows a few areas of concern. Consensus risk data show deterioration across all types of banks, especially those in Latin America and G-SIBs. The core plumbing of the financial system also shows signs of strain, with four out of five categories of intermediaries seeing more downgrades than upgrades, led by prime brokers; a group heavily involved in multiple ends of the financial system. This is an area worth keeping an eye on.”
As noted by Valeri Sokolovski, Magnus Dahlquist, and Erik Sverdrup in Fortune earlier this year, “the risk of a prime broker shock negatively affecting their hedge fund clients is much larger than any potential risk of a hedge fund adversely affecting its prime broker.”
The Financial Counterpart Monitor from Credit Benchmark provides a unique analysis of the changing creditworthiness of financial institutions. The report, which covers banks, intermediaries, buy-side managers, and buy-side owners, summarizes the changes in credit consensus of each group as well as their current credit distribution and count of entities that have migrated from Investment Grade to High Yield.
The data, which is based on the credit risk views of Credit Benchmark’s contributing financial institutions, is also available at the legal entity level. Users of the data can monitor and be alerted to the changing credit consensus of their financial counterparts.