Banks' management of credit risk should help them withstand shocks, says S&P

The global banking industry is generally strong and able to deal with sudden shocks because of its improved risk management, according to research by rating agency Standard & Poor's.

Introducing the agency's new banking industry country risk assessments, Standard and Poor's analysts Scott Bugie, John Chambers and Ryan Tsang wrote: "The global financial system is in rude health in 2006... risk charges for loan losses are low, profits are high and business flows robust."

Although developed economies remain vulnerable to a sudden rise in interest rates, or another shock such as a widening of credit spreads, a fall in the dollar, or a further rise in energy prices, their banks are in a strong position to ride out the upset, the report said. It added that better portfolio management techniques, and use of securitisation and credit derivative hedges, had led to a greater dispersal of credit risk.

However, the report warned that late 2006 and 2007 would see an increase in corporate defaults from their current nadir, reaching 4.5% in US speculative-grade debt by the end of 2007 from its record low of 1.3% in early 2006.

The report also warned that China's banking system carried significant amounts of bad debt, and this, with a large debt-financed increase in production capacity, made the country particularly vulnerable to a slowdown.

The ratings grade national banking systems on a scale of 1 (most reliable) to 10. Of the world's major economies, Canada, France, the UK and the USA were rated 1. Italy, due to sluggish growth and poor government finances, was rated 2; Germany's inefficient and fragmented banking system earned it a 3, along with Japan. Classed as "relatively weak" (7-10) were China (7) and Russia (9).