Australia, Canada, Sweden Banks May Pose Global Systemic Threat

International investors are being urged to steer clear of banks in Australia, Canada and Sweden by a leading investment consultancy, which has sounded the warning about the risk they may pose to the entire financial system if interest rates rise and the Chinese economy slows.

The combined weight of these banks on world equity markets is four times larger than their share of the global economy, London-based Absolute Strategy Research said in a note to clients, AFR.com reported.

Investors were “underestimating just how damaging a group of countries that account for just 3% of global GDP can be”, ASR said in a12-page report sent last week to its institutional clients that include several of Australia›s largest funds.

“High house prices, a build-up of household debt post-global financial crisis (2007-2008), and–for Canada, Sweden and Australia–banking sectors that are more than 20% of local market cap and 13% of ‹global banks›, make these markets likely sources of financial market instability in the year ahead,” ASR said.

“The banking sectors in three of these economies have increased in size relative to their own economies and, potentially, in importance in the global financial system.”

While the five economies it dubbed the “CANNS” (Canada, Australia, New Zealand, Norway and Sweden) represented a modest portion of the global economy, the size of their banking sectors, which have benefited from low rates and exposure to China, had grown dangerously out of proportion.

These economies, it said, would be “highly important for global investors to monitor in 2018”.

A banking sector, it said, that accounted for 20% of total market capitalization was a “danger signal” in developed markets as major economies have not been able to “sustain” such a large financial sector.

ASR cited Japan in the 1990s, the United Kingdom in 2003-04 and the eurozone in 2007 as instances when banks had reached one fifth of their respective equity markets only to fall sharply in value. Australia, it noted, has been “the only major counter-example”.