Garnet Capital Advisors Blog

July 17, 2015

Greece, China volatility puts pressure on the average bank

Global economic volatility reached a peak recently as both Greece and China were in turmoil. In the Asian nation, the Chinese stock market has been up and down, affectionately dubbed a "roller coaster" by The Wall Street Journal, while Greece has made headlines by its back-and-forth debate over a Eurozone bailout.

Here in the U.S., these two major economic news stories have many investors, businesses and banks on notice. What will happen if Greece votes down its bailout conditions? Or if the Chinese stock market continues its free fall?

All banks can be affected
For some, it seems like these situations won't have a major effect on the local "Main Street" bank in the U.S. However, as explained by American Banker, changes could be coming that will impact banks big and small.

The key point of emphasis here is with interest rates. While the Federal Reserve was waiting out Greece and China - Greece was engaged in a "will they or won't they" vote regarding Eurozone bailout demands, according to The Wall Street Journal -  it will be more likely to delay any interest rate hikes. Since they are already so low, banks will have to wait even longer for economic relief in this way.

Interest rates affect all banks, no matter the size, and already tight margins could get tighter as the Fed continues to monitor Greece and China.

Mortgage activity could see a boost
And, with lower interest rates comes more borrowers looking to either take out a loan or refinance their existing residential financing.

This latter segment - refinancing - will especially receive a boost with maintained low rates. More homeowners will call up their local banks in search of favorable terms.

"We could see rates move sharply lower from here should conditions continue to deteriorate in Greece," Scott Buchta, head of fixed-income strategy at Brean Capital, told American Banker.

Investors may get hungrier
Another effect of the current Greece and China situations is with investors. As market volatility increases, more investors may be looking for safer assets. According to American Banker, the appeal of U.S. government-backed bonds has already led to lower rates for these safer assets.

Furthermore, banks with a large amount of these bonds or similar Treasuries could see increased investor activity. If rates continue to decline, it would mean banks have a greater opportunity to trade with hungry investors.

However, these changes are small. This was the point emphasized by Tim Yeager, a finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis.

"To the extent that bond prices are pushed up, there could be some increased capital gains, but I don't anticipate that the effect is going to be very noticeable," Yeager told American Banker.

At the end of the day, the Main Street banks will have to keep an eye on Greece and China just as much as the major financial institutions in the U.S. As the economic crises play out, it is worth paying attention to see if any further changes will occur here at home.