Banks & Interest Rates Archives - Page 36 of 63

August 28, 2014

Banks hold more risk than before GFC | Chris Joye

Chris Joye explains why risk-weighted capital ratios used by Australia’s major banks are misleading and why true leverage is more than 20 times tier 1 capital.

It was only after 2008 when regulators allowed the majors to slash risk-weightings on home loans from 50 per cent to 15 per cent today that we have seen their reported and purely academic tier one capital measured against these newly “risk-weighted” loan assets which shrunk in value spike from 6.7 per cent in December 2007 to 10.5 per cent in June 2014.

By arbitrarily boosting the risk-free share of major bank home loans from 50 per cent to 85 per cent via the regulatory artifice that is a risk-weighting, one gets the fictional jump in their tier one capital that everyone believes is real.

August 22, 2014

Putin antics fail to impress markets

For all his macho posturing, Vladimir Putin has demonstrated an inability to move financial markets with his antics in Eastern Ukraine. His latest incursion towards Luhansk, with white-painted military trucks bearing aid to the rebel-held city, unchecked by the Red Cross, passed barely noticed. Instead markets are intently focused on nuances from a 68-year old Jewish mum at Jackson Hole, who also happens to chair the Federal Reserve.

I would have loved to call Janet Yellen a “grandmother”, but son Robert Akerlof — himself a PhD in Economics — does not claim any offspring on his CV. The apple doesn’t fall far from the tree. Husband, George Akerlof, is a Nobel prize-winning economist and professor emeritus at University of California, Berkeley.

The image below highlights the differences between the Fed and the ECB:

European unemployment is nearly twice the rate in the U.S.: http://t.co/ELXH1YcCcw pic.twitter.com/i5FQ1YvXBk

— Bloomberg News (@BloombergNews) August 22, 2014

The Fed’s more stimulatory approach has paid dividends in terms of economic growth and employment while inflation expectations remain muted. The inflation breakeven rate — 10-year Treasury yield minus the yield on equivalent inflation-indexed securities — continues to range between 2.0% and 2.50%.

Inflation breakeven rate

The ECB’s more austere approach, on the other hand, has caused a world of pain.

Market update

S&P 500 tests 2000.
VIX continues to indicate a bull market.
DAX hesitant rally.
China bullish.
ASX 200 faces strong resistance.

The S&P 500 hesitated after making a new high on Thursday, but there was no dramatic fall in response to news from Eastern Ukraine. Expect retracement towards 1950, followed by another test of 2000. 21-Day Twiggs Money Flow is likely to re-test the zero line, but respect would indicate strong buying pressure. Breach of support at 1900, warning of a reversal, remains unlikely.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

Declining CBOE Volatility Index (VIX) indicates low risk, typical of a bull market.

S&P 500 VIX

Germany’s DAX rallied above 9300 on the weekly chart, but 13-week Twiggs Money Flow warns of continued selling pressure. Reversal below support at 8900/9000 would warn of a primary down-trend.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

Shanghai Composite Index is testing resistance at 2250. Breakout would confirm a primary up-trend, signaling an advance to 2500*. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of resistance, however, would suggest further consolidation.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

Tall wicks on ASX 200 daily candles indicate strong resistance at 5650. Respect would suggest retracement to 5550, while follow-through would be a strong bull signal, suggesting an advance to 5850*. Another 21-day Twiggs Money Flow trough above zero would indicate long-term buying pressure. Reversal below 5450 is unlikely, but would warn of a test of primary support.

ASX 200

* Target calculation: 5650 + ( 5650 – 5450 ) = 5850

August 22, 2014

Bank chiefs in last-ditch plea to David Murray on tougher rules | The Australian

From Richard Gluyas at The Australian:

THE four major-bank chief executives have each made an eleventh-hour appeal to members of the Murray financial system inquiry ahead of Tuesday’s closing date for final submissions, as concerns mount that the sector could be forced to hold even higher levels of bank capital due to the inquiry’s emphasis on resilience. The closed-door meetings with the inquiry panel members come as Steven Munchenberg, chief executive of peak lobby group the Australian Bankers’ Association, said the industry was “jittery” about the inquiry’s focus on balance-sheet resilience because more onerous capital requirements would affect the banks’ ability to lend and serve the economy.

I disagree. Banks with strong balance sheets are better able to serve the needs of the economy. Highly leveraged banks leave the economy vulnerable to a financial crisis and are more likely to contract lending during periods of economic stress.

The shrill outcry may have something to do with the impact on bankers bonuses. Incentives based on capital employed would shrink if shareholder’s capital is increased.

Bank shareholders on the other hand are likely to benefit from stronger balance sheets. Reduced default risk is likely to enhance market valuation metrics like price-earnings multiples. Reduced risk premiums will also lower cost of funding and enhance lending margins. And shareholders are also likely to benefit from enhanced growth prospects. Analysis by the Bank for International Settlements in the post crisis period shows banks with higher capital ratios experience higher asset and loan growth.

August 22, 2014

Bank Watch: US Tsy’s OFR Finds Risk Weighting Has No Clothes | MNI

Denny Gulino writes on recent research commissioned by Treasury Department’s Office of Financial Research (“OFR”) to investigate the validity of using risk-weightings to determine bank capital requirements:

On risk weighting, OFR commissioned researchers Paul Glasserman at Columbia University and Wanmo Kang of the Korea Advanced Institute of Science and Technology to examine the subject from the ground up. As much as the practice has been incorporated in regulatory parlance, they were able to find very little other research on the validity of the weighting methodology.

“Risk weights implicitly assign prices in terms of additional capital to asset categories and thus inevitably create incentives for banks to choose some assets over others,” they wrote.

“Surprisingly,” they went on, “the ideal risk weights turn out to have little to do with risk and are instead proportional to the profitability on each asset.”

August 22, 2014

Paul Krugman: Hawks Crying Wolf | NYTimes.com

According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation…

…The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again…

August 10, 2014

European Depression | Business Insider

Joe Weisenthal quotes Carl Weinberg of High Frequency Economics:

For Euroland, the big picture is that the economy is in its seventh year of depression. On our estimate of a 0.7% contraction in the second quarter, GDP was still 3.2% lower than it was in the first quarter of 2008, when the depression began. Euroland’s economy actually contracted in the first quarter of this year when you exclude Germany’s unexpected surge to a 3.3% annualized rate of growth. Only people who were misled by Markit’s untested and unproven PMIs believed that such growth was real and sustainable. Our estimate of second quarter GDP for the Euro Zone includes a contraction of Germany’s economy at a 2% annualized rate, reversing the windfall in the unexplained and inexplicable first quarter spurt. If our forecast proves correct, average GDP growth for Germany in the first half of 2014 will work out to 0.7% at an annualized rate, clearly less than potential but very much in line with the experience over the last few years. Our estimate for France’s economy is a more horrible contraction of 1.1% for the quarter, or 4.3% at an annualized rate.

The European Central Bank (ECB) has been shrinking its balance sheet since 2012 while the Fed has been expanding. Not hard to figure out why the Monetary Union (EMU) is undergoing a contraction.

ECB Total Assets

Especially when private (nonfinancial) credit is contracting.

Euro Area Private Nonfinancial Credit from Banks

August 10, 2014

Australia’s Major Banks Say The Murray Enquiry Used The Wrong Numbers… | Business Insider

From Greg McKenna:

The AFR reports ….the Australian Bankers Association CEO Steven Munchenberg said the banks are “concerned that if some of the statements in the interim report – that Australia’s capital is middle of the road, that housing is a systemic risk – are allowed to remain unchallenged and are then taken out of context that is going to cause us a lot of future grief”.

Munchenberg says the Inquiry hasn’t calculated the capital ratios correctly.

“The approach was simplified and didn’t take into account the complexities and nuances of how capital is determined in Australia, including deductions required by APRA and some of the areas where APRA has adopted a more conservative approach, and as a result underestimated the amount of capital in Australia relative to overseas”, he told the AFR.

Forget the nuances and comparisons to the plight of other banks. Australian banks need to almost double their capital and adopt a more conservative approach to home mortgage lending if they are to withstand future shocks. 3 to 5 percent capital against total exposure doesn’t get you very far. The history of low mortgage failures over the last 3 decades, in an expansionary phase of the credit market, is unlikely to be repeated during a contraction.

August 9, 2014

Why is the Yield Curve Flattening? | PRAGMATIC CAPITALISM

Interesting view from Cullen Roche:

Most fixed income traders view long rates as a function of the economy and short rates as a function of the Fed’s views on the economy. So, when the Fed increases rates it means that the Fed thinks the economy is improving and needs some tightening so it doesn’t cause the Fed to create too much inflation and overheat the economy. But fixed income traders account for this and front-run the Fed’s thinking by trying to anticipate their views on the economy. Said more simply – long rates are a function of short rates for the most part. And the fact that long rates are remaining low means that fixed income traders increasingly believe that we’re in a permanent state of low interest rates.

July 31, 2014

What caused the Dow sell-off?

Dow Jones Industrial Average fell 1.88% to close at 16563, breach of 16750 warning of a secondary correction. Decline of 21-day Twiggs Money Flow below zero would strengthen the signal. Breach of primary support at 15500 is unlikely and the trend remains upward.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The S&P 500 also fell sharply. Reversal below 1950 warns of a test of medium-term support at 1900. Breach of primary support at 1750 again appears unlikely.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

The CBOE Volatility Index (VIX) spiked up, but remains below 20 — values normally associated with a bull market.

VIX Index

What caused the sell-off? Commentators seem puzzled. Theories advanced vary from Argentinian default to developments in Eastern Europe. Neither of these seem to hold much water: the market has been aware of the risks for some time and they should be largely discounted in current prices. My own preferred theory is the expectation of a rate rise from the Fed. With good GDP numbers and falling unemployment the Fed may be tempted to tighten a lot sooner than originally expected. Even oil prices are falling. High crude prices is one of the reasons for the cautious Fed taper so far.

Nymex Light and Brent Crude

Which makes me suspect that this correction is going to end like the last “taper tantrum” — with a strong rally when the market realizes that economic recovery will lift earnings.

July 30, 2014

Shilling: Big Banks Shift to Lower Gear | The Big Picture

Gary Shilling describes how US regulators are getting tough with big banks:

Break-Up

Like unscrambling an egg, it’s hard to envision how big banks with many, many activities could be split up. But, of course, one of the arguments for doing so is they’re too big and too complicated for one CEO to manage. Still, there is the example of the U.K., which plans to separate deposit-taking business from riskier investment banking activities – in effect, recreating Glass-Steagall.

In any event, among others, Phil Purcell believes that “from a shareholder point of view, it’s crystal clear these enterprises are worth more broken up than they are together.” This argument is supported by the reality that Citigroup, Bank of America and Morgan Stanley stocks are all selling below their book value Chart 5. In contrast, most regional banks sell well above book value.

Push Back
Not surprising, current leaders of major banks have pushed back against proposals to break them up. They maintain that at smaller sizes, they would not be able to provide needed financial services. Also, they state, that would put them at a competitive disadvantage to foreign banks that would move onto their turf.

The basic reality, however, is that the CEOs of big banks don’t want to manage commercial spread lenders that take deposits and make loans and also engage in other traditional banking activities like asset management. They want to run growth companies that use leverage as their route to success. Hence, their zeal for off-balance sheet vehicles, proprietary trading, derivative origination and trading, etc. That’s where the big 20% to 30% returns lie – compared to 10% to 15% for spread lending – but so too do the big risks.

Capital Restoration
….the vast majority of banks, big and small, have restored their capital….Nevertheless, the FDIC and Federal Reserve are planning a new “leverage ratio” schedule that would require the eight largest “Systemically Important Banks” to maintain loss-absorbing capital equal to at least 5% of their assets and their FDIC-insured bank subdivisions would have to keep a minimum leverage ratio of 6%. This compares with 3% under the international Basel III schedule. Six of these eight largest banks would need to tie up more capital. Also, regulators may impose additional capital requirements for these “Systemically Important Banks” and more for banks involved in volatile markets for short-term borrowing and lending. The Fed also wants the stricter capital requirements to be met by 2017, two years earlier than the international agreement deadline….

CEO remuneration is largely driven by bank size rather than profitability, so you can expect strong resistance to any move to break up too-big-to-fail banks. Restricting bank involvement in riskier enterprises — as with UK plans to separate deposit-taking business from riskier investment banking activities — may be an easier path to protect taxpayers. Especially when coupled with increased capital requirements to reduce leverage.