Banks & Interest Rates Archives - Page 41 of 65

April 26, 2014

Fractional reserve banking: ‘the chief loose screw’ | House of Debt

By Atif Mian and Amir Sufi quote from The Chicago Plan (1933-1939) of which Irving Fisher was a strong supporter:

“A chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of our circulating medium [money] by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions.”

April 13, 2014

Murray must target ‘intermediation’ | InvestorDaily

Compulsory and tax-advantaged superannuation has the effect of inflating funds flowing into the financial sector, said the submission [to the Financial System Inquiry].

“We note an emerging body of research concluding that beyond a threshold level, financial sector size and growth have a negative association with stability, economic growth and productivity,” Regnan said.

April 13, 2014

Disturbing trends with financial crises

From the Economist:

Five devastating slumps—starting with America’s first crash, in 1792, and ending with the world’s biggest, in 1929—highlight two big trends in financial evolution. The first is that institutions that enhance people’s economic lives, such as central banks, deposit insurance and stock exchanges, are not the products of careful design in calm times, but are cobbled together at the bottom of financial cliffs. Often what starts out as a post-crisis sticking plaster becomes a permanent feature of the system. If history is any guide, decisions taken now will reverberate for decades.

This makes the second trend more troubling. The response to a crisis follows a familiar pattern. It starts with blame. New parts of the financial system are vilified: a new type of bank, investor or asset is identified as the culprit and is then banned or regulated out of existence. It ends by entrenching public backing for private markets: other parts of finance deemed essential are given more state support. It is an approach that seems sensible and reassuring. But it is corrosive. Walter Bagehot, editor of this newspaper between 1860 and 1877, argued that financial panics occur when the “blind capital” of the public floods into unwise speculative investments. Yet well-intentioned reforms have made this problem worse.

…..To solve this problem means putting risk back into the private sector. That will require tough choices. Removing the subsidies banks enjoy will make their debt more expensive, meaning equity holders will lose out on dividends and the cost of credit could rise. Cutting excessive deposit insurance means credulous investors who put their nest-eggs into dodgy banks could see big losses…..

Read more at Financial crises | The Economist.

April 8, 2014

Big Banks to Get Higher Capital Requirement – WSJ.com

Stephanie Armour and Ryan Tracy discuss the new leverage ratio that the eight biggest US lenders will be required to meet:

The eight bank-holding companies would have to hold loss-absorbing capital worth at least 5% of their assets to avoid limits on rewarding shareholders and paying bonuses, and their FDIC-insured bank subsidiaries would have to keep a minimum leverage ratio of at least 6% or face corrective actions. That is higher than the 3% agreed upon under global standards, which U.S. regulators have seen as too weak.

[FDIC Chairman Maurice] Gruenberg said leaving the leverage ratio at 3% for large banks “would not have meaningfully constrained leverage during the years leading to the crisis.” He said the rule “may be the most significant step we have taken to reduce the systemic risk posed by these large complex banking organizations.”

Banks are pushing back against the new ratios required by the Fed, FDIC and the Office of the Comptroller of the Currency.

Banks have balked at the leverage ratio, saying it will curtail lending and saddle them with more costs that leave them at a competitive disadvantage against foreign banks with lower capital requirements. Banks will have to hold that capital as protection for every loan, security and asset they hold, not just those deemed risky.

As a general rule, share capital is more expensive than debt, but that may not be the case with highly leveraged banks if you remove the too-big-to-fail taxpayer subsidy. Improved capital ratios would lower the risk premium associated with both the cost of capital and the cost of debt, offering a competitive advantage over foreign banks with higher leverage.

I would like to see APRA impose a similar minimum on Australia’s big four banks which currently range between 4% and 5%.

March 27, 2014

Andreas Dombret: What is going on in Europe? The view from within

From a speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the New York Stock Exchange, New York, 26 March 2014:

How do we get to the end of the tunnel?

At the European level, the most important project is the banking union. The banking union is most certainly the biggest step since the introduction of the euro. And it is the most logical step to take. A single currency requires integrated financial markets and this includes the supervision of banks.

Consequently, one of the pillars the banking union rests upon is a Single Supervisory Mechanism – that is European bank supervision for the largest banks. Centralising supervisory powers in such a way can foster a comprehensive and unbiased view upon banks. It also enables policy action that is not held hostage by national interests. Thus, it will contribute to more effective supervision and better cross-border cooperation and coordination.

March 8, 2014

Recession time for Russia | The Market Monetarist

Lars Christensen at The Market Monetarist writes:

….. sharply increased geo-political tensions in relationship to Putin’s military intervention on the peninsula of Crimea has clearly shocked foreign investors who are now dumping Russian assets on large scale. Just Monday this week the Russian stock market fell in excess of 10% and some of the major bank stocks lost 20% of their value on a single day.

In response to this massive outflow the Russian central bank – foolishly in my view – hiked its key policy rate by 150bp and intervened heavily in the currency market to prop up the rouble on Monday. Some commentators have suggested that the CBR might have spent more than USD 10bn of the foreign currency reserve just on Monday. Thereby inflicting greater harm to the Russian economy than any of the planned sanctions by EU and the US against Russia.

By definition a drop in foreign currency reserve translates directly into a contraction in the money base combined with the CBR’s rate hike we this week has seen a very significant tightening of monetary conditions in Russia – something which is likely to send the Russian economy into recession (understood as one or two quarters of negative real GDP growth).

February 16, 2014

Declining US commercial bank loans?

Sober Look highlights the sharply declining ratio of commercial bank loans and leases to bank deposits.

Ratio of commercial bank loans and leases to bank deposits

Its only when we examine the detail, however, that we note cash reserves have ballooned in the last 10 years. And most of those cash reserves are deposits at the Fed which now (post-GFC) earn interest. Adjust total deposits at commercial banks, for the excess reserves deposited back with the Fed, and the current ratio of 1:1 looks a lot healthier.

Ratio of commercial bank loans and leases to bank deposits Adjusted for Excess Reserves

As I pointed out in November, most new money created by the Fed QE program is being deposited straight back with the Fed as excess reserves. We need to adjust bank deposits for this effect to obtain a true reflection of bank lending activity.

February 5, 2014

Interest rates and corporate profits

Low interest rates clearly boost corporate profits. The inverse relationship is evident from the strong profits recorded in the 1950s, when corporate bond rates were lower than at present, and also the big hole in profits in the 1980s, when interest rates spiked dramatically during Paul Volcker’s reign at the Fed.

Corporate Profits and AAA Bond Yields

The outlook for inflation is muted and the rise in interest rates likely to be gradual over several years, rather than a sharp spike, if the Fed has its way.

November 22, 2013

Why does QE taper spook the market if it will have no real impact?

Question received from CG about the impact of QE and Fed taper:

I’m not arguing against the data presented on the graph, but if true that most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed, why do the markets get spooked every time there are whispers that the Fed is going to reduce QE?

The comment CG is referring to:

Currently, there is evidence of expansive monetary policy from the Fed, but the overall impact on the financial markets is muted. Most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed. The chart below compares Fed balance sheet expansion (QE) to the increase in excess reserve deposits at the Fed.

A classic placebo effect, the Fed is well aware that the major benefit of their quantitative easing program is psychological: there is little monetary impact on the markets.

My answer:
The markets have no real reason to fear a QE taper. I think this is more psychological than physical. The current mind-set is:

If the Fed begins to taper, that marks the end of the bull market in bonds. Rising bond yields and higher long-term interest rates may slow industry investment and recovery of the housing market and this would be bad for the economy.

In other words, they still have a bearish outlook. At some point they will shift to the counter-argument:

QE taper and rising interest rates indicate Fed faith in the recovery and are a bullish sign for stocks. It also means the economy is reverting to a sustainable path.

The bottom-line is that markets are driven as much by emotion as by logic.

November 11, 2013

NAB Convertible Pref issue | FIIG

From FIIG Newswire:

National Australia Bank Limited (ASX:NAB) has announced to the ASX the issue of a listed, floating rate convertible preference share (\”CPS II\”) with an indicative dividend of 325 to 340 bps over the bank bill swap rate. NAB is seeking to raise $750,000,000 for general corporate purposes. APRA has confirmed that the CPS II will count as additional Tier 1 Capital, supporting the NAB\’s regulatory capital requirements.

A welcome move to see the big four banks raising more Tier 1 capital. My view is that TBTF banks should have a minimum leverage ratio of 10 percent — more than double the current 4 to 5 percent.