In a conversation between Aleister and James, they discussed the topic of globally systemically important banks (G-SIBs) and the potential risks associated with them. G-SIBs are large banks with international business, exposing them to counterparty risks that can spread across different jurisdictions. The level of balance sheet leverage of G-SIBs in various countries can be compared through the list of around 28-29 G-SIBs. The market has been rating these banks at a substantial discount to book value, indicating a high level of risk. With rising interest rates, the problem of G-SIBs is expected to become worse, with more companies unable to meet their interest payments due to the weakening economy. The early 1970s also saw similar problems with banks, and the rise of G-SIBs and associated issues is likened to a repeat of this era.
In order to keep bank balance sheets in balance, banks borrow and lend to each other to bring them back into balance and to prevent counterparty risk. The rise of globally systemically important banks (G-SIBs) and issues similar to those in the early 1970s are causing concern about potential tough times ahead. The recent examples include the Hairstadt bank and the Japanese banks. Japan’s situation is an example of a potential flashpoint, bringing problems to the international banking system and impacting the dollar and gold prices. The dollar is no longer a safe haven currency, and there is a real overhang of dollars and dollar financial assets that will be sold in a continuing bear market driven by a longer-term trend of rising interest rates. Rising interest rates make it difficult for the U.S. government to fund itself, and it is not just the U.S. government but Western governments that have entered into a debt trap. The geopolitical situation for the dollar is also alarming with a fundamental shift away from the dollar as the world’s reserve currency expected to occur by 2023. This shift has implications for America’s role as the world’s policeman and its hegemony.