Banks Hold Many Illiquid Assets

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The trend in the increased holding of risky assets continues. Because of Covid-19, the big banks now hold more illiquid, opaque assets than before.

Lenders including Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA reported a surge of more than 20% in their most opaque assets during the chaotic first half of 2020, Bloomberg calculations show. The banks are now sitting on hard-to-value trades that they say are worth about $250 billion, including categories that gained notoriety during the financial crisis, such as complex debt securities.

illiquid assets

These assets are hard to value, and they can cause a financial crisis like the one we had in 2008.

There’s little market data for Level 3 assets — which include distressed debt, some mortgage-backed bonds, high-risk loans and derivatives linked to everything from interest rates to corporate debt — so banks get to value them based on historical trends and their own risk assumptions. Read more

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