The credit crunch era has seen a whole litany of policies to help and aid the banking and financial sector. The most obvious was all the bailouts which took place across the world. A sub-plot to this was the way that such large losses could be made without it apparently being anybody’s fault! This was particularly odd as of course these individuals were so highly paid due to claimed skills and talent. Or to put it another way we went from privatisation of profits to socialisation of losses.
Central banks then joined in by slashing official interest-rates and then by indulging in QE (Quantitative Easing) policies to reduce bond yields and mortgage rates as well. Along the way we got specific schemes to aid ( Special Liquidity Scheme in the UK) the banks and then later to subsidise lending ( Funding for Lending Scheme). These were often described as help for smaller business but of course mostly found their way into the mortgage market which was a double gain for the banks and financial institutions. Not only did they get cheap funding but the consequent lower mortgage rates boosted their asset book via higher house prices. As Hot Chocolate reminded us for the banks and economic policy.
Everyone’s a winner, baby, that’s no lie (yes, no lie)
You never fail to satisfy (satisfy)
Let’s do it again.
These present several problems for the banking industry. There is quite an irony here as of course they are results of efforts to save and then boost the banking industry. It has mostly been forgotten but an early sign of fears of trouble came in the UK when the Bank of England cut its Bank Rate to 0.5%. The Cheltenham and Gloucester 4 year tracker mortgage at 0.52% below that focused minds. As the Ivory Tower occupants adjusted to higher oxygen levels at ground level they also had to adjust to the arthritic natures of the Information Technology systems of the UK banks which had remained in the era of where we had VHS and cassette tapes and so on. Ooops! Could they cope with this? I believe that this was the main reason the Bank of England did not cut Bank Rate below 0.5% back then and leading some ( Mark Carney) for instance to think of it as a lower bound.
There was a work around which others have repeated since where the negative interest-rate was bypassed via reducing the capital owed each year to compensate. Actually for those wondering I have seen this used elsewhere too making me wonder about IT there. Then we note the other potential problems which where would depositors simply leave as they received negative interest-rates? Also what would happen if borrowers could borrow at negative interest-rates would borrowing go to plagiarise myself from yesterday “To Infinity! And Beyond!” Even worse what would be the impact of the fact that when banks deposit at the central bank as they do in size they would have to pay for the privilege? A survey from the ECB this week had 81% of banks replying to say that negative interest-rates hurt their profits. As we mull whether 19% did not reply we know that the central banks will respond to this especially in a Euro area promising more of the same.
Draghi: We continue to expect rates to remain at present or lower levels for extended period of time; well past horizon of asset purchases
Oh and if you were wondering if banks were being hurt by this well we got an official denial of it and you know what that means!
Draghi: In the first full year of negative interest rates profitability of banks has gone up
Just to add to the problems there are further troubles for banks which either operate in or own businesses for the longer term as Mario Draghi admitted yesterday.
It’s pretty evident that pension funds and insurance companies and other actors are significantly affected by the low level of interest rates.
Actually he summed up the full state of play quite well here.
I think they are being affected by low rates, although one should keep in mind that they also realised substantial capital gains on the bonds that we are buying, because some of them are amongst the main sellers, the main counterparties in our asset purchase programme.
So Jam yesterday which is still around today but tomorrow looks somewhat jam free which of course will disappoint the White Queen for starters.
Bank of Japan
Today’s news is brought to us from Bloomberg.
The yen dropped the most in seven weeks after people familiar with the matter said that the Bank of Japan may consider helping financial institutions to lend by offering a negative rate on some loans.
There is a lot to cover here so let me start with the fact that over the “lost decade” period the Bank of Japan has had policy after policy to boost loans and if any of them had worked the “lost decade” would be over. How do you say “disintermediation” in Japanese? Also those who follow the currency will have noticed the plummet today to 110.5 to the US Dollar although of course we know to take care with knee-jerk reactions as the Euro taught is less than 24 hours ago.
Returning to the subject at hand this is intriguing as Japan’s baby step into negative interest-rates went to quite a lot of trouble to avoid affecting the banks. But seemingly we have seen yet another misfire over there. Thus another plan is mooted to help them. It seems to be ploughing a rather similar furrow to the ECB move in this area from the 11th of March.
Banks will pay the MRO rate at the time of bidding, so right now it’s zero. And they may even get a reduction on that rate which increases with the amount of loans they grant. So the maximum reduction will bring the rate on the TLTRO II to the level of the deposit facility rate at the time of bidding.
I guess many of you have the feeling that banks will invariably find that they qualify to borrow at -0.4%. Would it be impolite to wonder if the Italian banks might get there first? I note that the VOX website on the 15th of April so a month later caught up with my view on the likely impact.
This column argues that this ‘cash for loans’ scheme, which might cost up to €24 billion, is unlikely to affect the real economy greatly. This is because banks can easily window dress their loans to qualify.
There is a fair amount of circularity here. You see in Japan each deal for the banks to boost the economy has apparently worked but then turned out to be window dressing. So as to the ECB and the Bank of Japan the answer to who is trolling who seems to be both of them.
The relationship between central banks and the banking sector is a symbiotic one and one which for today’s musical theme could be in purple as they sing to each other.
I would die 4 u
I would die 4 u
It has been a Sign O’ The Times that the banks have taken the Cream whilst the real economy is left wondering where all the money went. That continues and yesterday luchtime I opened my view on the Riksbank on Share Radio with some lyrics which had deeper meanings as the bad news arrived. RIP Prince.
We are gathered here today
2 get through this thing called life
Transparency on our finances and behaviour is in the UK apparently only for plebs like us. From Naked Capitalism.
George Osborne has agreed to make MPs exempt from anti-money laundering checks under pressure from moaning Tory backbenchers……..Tory MP Charles Walker claimed MPs and their families were being treated like “African despots”……. MPs appear on automatic watch lists of “Politically Exposed Persons” (PEP), used by banks to prevent money being funnelled into criminal gangs or hidden in offshore tax havens.
Er they used to appear.