Banks & Interest Rates Archives - Page 40 of 62

July 4, 2013

Surprise as BOE, ECB Give Forward Guidance | WSJ

New [BOE] governor Mark Carney has already made changes. In a statement accompanying the widely-expected decision to leave both rates and asset purchases unchanged, the BoE said that rising market rates had shifted expectations for the Bank Rate above levels that were justified by the economic situation.

The fact that there was a statement at all indicated a change in policy. The old BOE just announced its decision and left interpretation to the markets.

This was a clear attempt to talk the markets down and it worked.

July 2, 2013

Australian banks: Who’s been swimming naked?

Margot Patrick at WSJ reports that the Bank of England is enforcing a new “leverage ratio” rule:

Top U.K. banks regulator Andrew Bailey told lawmakers that the requirement for banks to hold at least 3% equity against total assets “is a sensible minimum,” and that those who fall short must act quickly, but without cutting their lending to households and businesses.

The Bank of England’s Prudential Regulation Authority on June 20 said Barclays and mutual lender Nationwide Building Society don’t meet the standard and gave them 10 days to submit plans for achieving it.

I hope that their Australian counterpart APRA are following developments closely. Both UK and Australian banks are particularly vulnerable because of their over-priced housing markets. And while the big four Australian banks’ capital ratios appear comfortably above 10 percent, these rely on risk-weightings of 15% to 20% for residential mortgages.

Only when the tide goes out do you discover who’s been swimming naked. ~ Warren Buffett

June 30, 2013

Bankers’ political influence cause for concern

I am not sure of the background to this, but it certainly looks as if the big UK banks were able to exert enough political pressure to remove Robert Jenkins from the Financial Policy Committee, the UK’s new stability regulator. Anne-Sylvaine Chassany at FT writes:

An outspoken advocate of tough bank regulation who has worked in banking and asset management, Robert Jenkins left the committee earlier this year after not being reappointed by George Osborne, chancellor.

If bankers’ influence was the cause, it certainly is cause for concern.

via Barclays’ threat on lending under fire – FT.com.

June 30, 2013

Barclays’ threat on lending under fire | FT.com

Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:

The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.

Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.

I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.

June 30, 2013

Lurking beneath Australia’s AAA economy… | On Line Opinion

Kellie Tranter highlights the unstable position of the big Australian banks:

Australia has had a current account deficit since the 1980s. That means we are spending more than we are earning. We’ve had to sell public assets to balance the current account deficit. Put simply, the surplus on the capital account is flogging off the sideboard to buy the fruit.

Our net international financial position is not strong and our gross foreign liabilities are alarming. Banks are the intermediaries between foreign lenders and Australia’s big spenders. The banks have mediated the private household debt and as a result if there is a worldwide recession, banks could be called to pay up.

Our banks have borrowed short (internationally) and lent long (domestically, for mortgages etc.)…….

I have been sounding off about the inadequate capital reserves of the big four banks — because of low risk-weightings attached to residential mortgages — but Kellie also raises the question of their $13.8 trillion derivatives exposure. She concludes:

If the banks are hunky dory why is it necessary [for the RBA] to set up a $380 billion emergency fund and, more importantly, is it enough in light of possible derivatives exposure?

June 30, 2013

Regulatory blight — or finally seeing the light?

This comment by Tim Congdon (International Monetary Research Ltd) on the UK shadow Monetary Policy Committee refers to the “regulatory blight” on banking systems as regulators switch from risk-weighted capital ratio requirements to a straight-forward, unweighted leverage ratio which requires some banks to raise more capital. What he fails to consider is that risk-weighting has contributed to the current parlous state of our banking system. Under risk-weighting, banks concentrated their assets in classes with low risk-weighting, such as residential mortgages and sovereign government bonds, where they were required to hold less capital and could achieve higher leveraged returns. The combined effect of all banks acting in a similar manner achieved a vast concentration of investment exposure in these asset classes, with the undesirable consequence that the underlying risk associated with these asset classes soared, leading to widespread instability across the banking system and fueling both the sub-prime and Euro zone sovereign debt crisis.

My last note for the SMPC opened with the sentence, ‘The regulatory blight on banking systems continues in all the world’s so-called “advanced” economies, which means for these purposes all nations that belong to the Bank for International Settlements.’ As I explained in the next sentence, the growth of banks’ risk assets is constrained by official demands for more capital relative to assets, for more liquid and low-risk assets in asset totals, and for less reliance on supposedly unstable funding (i.e., wholesale/inter-bank funding). The slow growth of bank assets has inevitably meant, on the other side of the balance sheet, slow growth of the bank deposits that constitute most of the quantity of money, broadly-defined. Indeed, there have even been periods of a few quarters in more than one country since 2007 in which the assets of banks, and hence the quantity of money, have contracted.

The equilibrium levels of national income and wealth are functions of the quantity of money. The regulatory blight in banking systems has therefore been the dominant cause of the sluggish growth rates of nominal gross domestic products, across the advanced-country world, that have characterised the Great Recession and the immediately subsequent years. Indeed, the five years to the end of 2012 saw the lowest increases – and in the Japanese and Italian cases actual decreases – in nominal GDP in the G-7 leading industrialised countries for any half-decade since the 1930s.

It is almost beyond imagination that – after the experience of recent years – officialdom should still be experimenting with different approaches to bank regulation and indeed contemplating an intensification of such regulation. Nevertheless, that is what is happening. The source of the trouble seems to be a paper given at the Jackson Hole conference of central bankers, in August 2012, by Andy Haldane, executive director for financial stability at the Bank of England. The paper, called The Dog and the Frisbee, argued that a simple leverage ratio (i.e., the ratio of banks’ assets to capital, without any adjustment for the different risks of different assets) had been a better pointer to bank failure than risk-weighted capital calculations of the kind blessed by the Basle rules. The suggestion is therefore that the Basle methods of calculating capital adequacy should be replaced by, or complemented by, a simple leverage ratio.

For banks that have spent the last five years increasing the ratio of safe assets to total assets, or that have always had a high proportion of safe assets to total assets, the potential introduction of a leverage ratio is infuriating. A number of banks have been told in recent weeks that they must raise yet more capital. Because it is subject to the new leverage ratio, Nationwide Building Society has been deemed to be £2 billion short of capital. That has upset its corporate plans, to say the least of the matter, and put the kibosh on significant expansion of its mortgage assets. And what does one say about George Osborne’s ‘Help to Buy’ scheme, announced with such fanfare in the last Budget and supposed to turbocharge the UK housing finance market?

The leverage ratio has been called Mervyn King’s ‘last hurrah’, since there can be little doubt that King has been the prime mover in the regulatory tightening that has hit British banking since mid-2007. He is soon to be replaced by Mark Carney, who may or may not have a different attitude. Carney has been publicly critical of Haldane and his ‘Dog and Frisbee’ paper, but that does not guarantee an early shift in the official stance. Indeed, it is striking that – of the bank’s top team under King – only Paul Tucker, generally (and correctly) regarded as more bank-friendly than King or Haldane, has announced that he is leaving the Bank once Carney has taken over.

My verdict is that the regulatory blight on UK banking is very much still at work. Further, without QE, the quantity of money would be more or less static. As before, I am in favour of no change in sterling interest rates and the continuation of QE at a sufficiently high level to ensure that broad money growth (on the M4ex measures) runs at an annual rate of between 3% and 5%. My bias – at least for the next three months – is for ‘no change’. It is plausible that I will be advocating higher interest rates in 2014. However, much depends on a realisation in official quarters that overregulation of the banks is, almost everywhere in the advanced world, the dominant explanation for the sluggishness of money supply growth and, hence, the key factor holding back a stronger recovery. Major changes in personnel may be in prospect at the Bank of England now that Mervyn King is leaving, but the Treasury – which I understand from private information will be glad to see the back of him – has failed to prevent the growth of a regulatory bureaucracy led by King appointees.

If having a well-capitalized banking system requires some “regulatory blight” then lets have more of it. Three cheers for Mervyn King and the (un-weighted) leverage ratio. Let’s hope that Mark Carney follows a similar path.
via David Smith’s EconomicsUK.com: IEA’s shadow MPC votes 5-4 for quarter-point rate hike.

June 3, 2013

Impact of QE (or lack thereof) is reflected by excess reserves

JKH at Monetary Realism writes:

….there is a systematic tendency in the blogosphere and elsewhere to misrepresent the impact of QE in a particular way in terms of the related macroeconomic flow of funds…… Most descriptions will erroneously treat the macro flow as if banks were the original portfolio source of the bonds that are being sold to the Fed, obtaining reserves in exchange. This is not the case. A cursory scan of Fed flow of funds statistics will confirm that commercial banks are relatively small holders of bonds in their portfolios, especially Treasury bonds. The vast proportion of bonds that are sold to the Fed in QE originate from non-bank portfolios……. Many descriptions of QE instead erroneously suggest the strong presence of a bank principal function in which bonds from bank portfolios are simply exchanged for reserves. In fact, for the most part, while the banking system has received reserve credit for bonds sold to the Fed, it has also passed on credits to the accounts of non-bank customers who have sold their bonds to the banks. This is integral to the overall QE flow of bonds.

There is a simpler explanation of what happens when the Fed purchases bonds under QE. Bank balance sheets expand as sellers deposit the sale proceeds with their bank. In addition to the deposit liability the bank also receives an asset, being a credit to its account with the Fed. Unless the bank is able to make better use of its asset by making loans to credit-worthy borrowers, the funds are likely to remain on deposit at the Fed as excess reserves — earning interest at 0.25% per year. Excess reserves on deposit at the Fed currently stand at close to $1.8 trillion, reflecting the dearth of (reasonably secure) lending/investment opportunities in the broader economy.

June 2, 2013

Sir Mervyn King: Public are right to be angry at banks | BBC News

From BBC News:

People have “every right to be angry” with banks for the UK’s financial crisis, the outgoing Bank of England (BoE) governor Sir Mervyn King says…..”But this crisis wasn’t caused by a few individuals, it was a crisis of the system of banking we had allowed to grow up. “It’s very important we don’t demonise the individuals but we do keep cracking on with changing the system.”

June 1, 2013

Too-big-to-fail Q&A. Get the facts | Sober Look

Interesting pro-bank piece by Sober Look. I have added my comments in italics.

The debate around “too big to fail” of the US banking system is often infused with political rhetoric and media hype. Let’s go through some Q&A on the subject and discuss the facts.

Q: Did large banks take disproportionate amounts of real-estate related risk vs. smaller banks prior to the crisis?

A: No. That’s a myth. Smaller banks were much more exposed to real estate (see discussion).

The issue is not real estate lending, but risky lending.

Q: Who had their snouts in the sub-prime trough, big banks or small banks?

A: Big banks.

Q: Which “too big to fail” banks were directly bailed out by the US federal authorities during the 2008 crisis?

A: While hundreds of banks were forced to take TARP funds, only Citigroup (among US banks) received an explicit bailout to keep it afloat. Note that Bear Stearns (and Lehman), AIG, GM/GMAC, Chrysler, Fannie and Freddie were not banks. Neither was GE Capital and other corporations who relied on commercial paper funding and needed the Fed’s help to keep them afloat. Wachovia may have become the second such large bank if it wasn’t purchased by Wells.

Q: Which “too big to fail” banks were indirectly bailed out by the US federal authorities during the 2008 crisis?

A: All of them

Q: Why did Citi fail in 2008?

A: Citi ran into trouble because of a massive off-balance-sheet portfolio the firm funded with commercial paper. In late 2007, when the commercial paper market dried up, Citi was forced to take these assets onto its balance sheet. The bank was not sufficiently capitalized to absorb the losses resulting from these assets being written down.

Citi was not the only TBTF bank that was inadequately capitalized to deal with losses.

Q: What were the assets Citi was “warehousing” off-balance-sheet?

A: A great deal of that portfolio was the “AAA” and other senior tranches of CDOs that Citi often helped originate (including mortgage related assets). Rating agencies were instrumental in helping banks like Citi structure these assets and keep them off balance sheet in CP conduits.

Q: Who paid the rating agencies?

A: The TBTF banks.

Q: Why did Citi (as well as many other banks) hold so much off-balance sheet?

A: Because they received a significantly more favorable capital treatment by doing so (the so-called “regulatory capital arbitrage” – see discussion from 2009).

Q: Did Citi break any state or federal laws by doing what it did?

A: No. All of this was perfectly legal and federal authorities were aware of these structures.

We need to fix the law so this cannot happen again.

Q: Did derivatives positions play a major role in Citi’s failure? Were other large US banks at risk of failure due to derivatives positions?

A: No. That’s a myth. The bulk of structured credit positions (tranches) that brought down Citi were not derivatives (just to be clear, CDOs are not derivatives).

Q: What has been done since 2008 to make sure the Citi situation doesn’t happen again?

A: The US regulators now have the ability to take over and manage an orderly unwind of any large US chartered bank. Banks are required to create a “living will” to guide the regulators in the unwind process. The goal is to force losses on creditors in an orderly fashion without significant disruptions to the financial system and without utilizing taxpayer money.

Large banking institutions are now required to have more punitive capital ratios than smaller banks.

Capital loopholes related to off-balance-sheet positions have been closed.

Stress testing conducted by the Fed takes into account on- and off-balance sheet assets, forcing banks to maintain sufficient capital to be able to take a hit. US banks more than doubled the weighted average tier one common equity ratio since the crisis (see attached).

Dodd-Frank has been “nobbled” by Wall Street lobbyists. Stress tests by captive regulators are not to be trusted. Increase transparency by supporting the Brown-Vitter bill.

Q: Do large US banks have a funding advantage relative to small banks?

A: Not any longer. According to notes from the meeting of the Federal Advisory Council

and the Board of Governors (attached – h/t Colin Wiles ‏@forteology), “Studies point to a significant decrease in any funding advantage that large U.S. financial institutions may have had in the past relative to smaller financial institutions and also relative to nonfinancial institutions at comparable ratings levels. Increased capital and liquidity, in addition to meeting the demands of many regulatory bodies, has largely, if not entirely, eroded any cost-of-funding advantage that large banks may have had.”

And we should believe them?

Q: Why do TBTF banks dominate the financial landscape?

A: Because of their taxpayer-subsidised funding advantage.

Q: What is the downside of breaking up banks like JPMorgan?

A: Large US corporations need large banks to provide credit and capital markets access/services (Boeing is not going to use Queens County Savings Bank). Without large US banks, US companies will turn to foreign banks and will be at the mercy of those institutions’ capital availability and regulatory frameworks. Foreign banks will also begin dominating US capital markets primary activities (bond issuance, IPOs, debt syndications, etc.) And in an event of a credit crisis foreign banks (who are to some extent controlled by foreign governments) will give priority to their domestic corporations, putting US firms at risk.

Agreed. Large corporations need large banks — or at least syndicates of mid-sized banks. Brown-Vitter does not propose breaking up any TBTF banks, merely requires them to clean up their balance sheets and carry adequate capital against risk exposure.

Q: How large are US largest banks relative to the US total economic output? How does it compare to other countries?

A: See chart below (the chart contrasts bank size as percentage of GDP of Swiss and UK banks to US banks)

Swiss and UK banks have global reach so rather compare absolute size rather than relative to GDP where the bank is headquartered.

So before jumping on the “too big to fail” bandwagon, get the facts.

via Sober Look: Too-big-to-fail Q&A. Get the facts.

I had to smile at the From our Sponsors Google ad at the end of the article, suggesting I open a business account with one of the major banks.

June 1, 2013October 5, 2017

Trust: Easy to Break, Hard to Repair | WSJ

Excellent interview of renowned short-seller Jim Chanos by Jason Zweig. Chanos list three reasons why the average investor is right not to trust the integrity of the financial markets…

First, in recent years financial fraud has rarely been detected and exposed by the people the public might reasonably expect to do so: accountants, regulators and law-enforcement authorities, whom Chanos calls “the normal guardians of the marketplace.” Instead, frauds more often have been rooted out by whistleblowers, short-sellers and journalists.

Second, prosecutions of financial crimes are essential in the minds of investors, but are discretionary in the eyes of government officials….. the so-called too big to jail rationale.

Third, individual investors will never trust the market until these issues are addressed.

To me the list is too short.

Chanos fails to mention the revolving door between Washington and Wall Street where regulators frequently swap sides — working for government the one day and in high-paying jobs on Wall Street the next — and have one eye on their career path rather than focusing on their current job.

Fifth, the massive financial leverage that Wall Street has on Capitol Hill where Congressmen, dependent on fundraisers sponsored by Wall Street lobbyists, allow same lobbyists to write some of the legislation that passes through the house.