Banks rather than the real economy remain the main priority of central banks

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.

Negative Interest-Rates

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.

Comment

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.

Dearly beloved
We are gathered here today
2 get through this thing called life

Meanwhile

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.

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31 thoughts on “Banks rather than the real economy remain the main priority of central banks

  1. According to A Bloomberg article there has actually been an agreement at the G20 to stop the currency wars and maybe even to prevent further interest rate cuts. I wonder how long the cease fire will hold? They refer to the dollar, euro and yuan but not other currencies so not sure how broad this agreement is.

    • Hi Pavlaki

      After the “news” from Japan which is sort of Open Mouth Operations from behind the hand, like the way football managers talk when on camera during a match, that has to pose at least a question for the Bloomberg view. The Yen closed at 111.8 versus the US Dollar or 2 handles and a bit lower on the day. Governor Kuroda’s weekend sake will be tasting rather nice around now!

  2. Tory MP Charles Walker claimed MPs and their families were being treated like “African despots”

    They will be despots now !

    if we cannot hold our elected representatives to the laws of country – who will ?

    Forbin

    • Hi Forbin

      That’s a good point as those who make the laws should be the group most covered by them. The judiciary and the law should be uninfluenced by the lawmakers.

      Strange goings on in corn prices with a surge to US $4 on Thursday then a drop to US $3,71 yesterday. Reminds me of the film Trading Places…

      Oh and as to your other comment below I was thinking of the parasite line myself and wish now I had put it in the piece.

  3. ” The relationship between central banks and the banking sector is a symbiotic one…..”

    a parasitical one on the rest of us , me thinks

    This is one of the problems , isnt it? along with pollies from HMG who go from job to job in the Banking sector after being kicked out / retired

    and with the same HMG putting these toadies into various govenment bodies……

    And we thought Nigeria was corrupt !

    Forbin

  4. Your mention of the Politically Exposed Person problem reminds me.

    When it comes to such persons the Banks know who they are, they are forced to know by the legislation. When it comes to banking scams against you and me, the fastest growing type of fraud, the banks apparently have not a clue who their customers are. If legislation forced the banks to be able, unequivocally, to identify the account holder (or beneficial owner) of their UK accounts then it might greatly reduce the fraudsters opportunities.

    • Hi Peter

      The banks have been making big efforts to find out more about their customers which is as you infer a good thing. They are also jettisoning some especially PEPs as frankly they can be more trouble than they are worth. But where does that take us? As you say we do not seem to have got much better on the fraud issue. That brings me to a fundamental problem which is that the official bodies like the Fraud Squad are not far off the equivalent of a chocolate teapot. So they shift the burden and the blame to the banks! Some of that is fair but when they couldn’t do anything themselves some of it is unfair.

  5. The Federal Reserve issued a recent letter to JP Morgan saying that its failure to produce a living will constituted a threat to the financial stability of the United States.

    It did not say a threat to J P Morgan or even a threat to the banking system but a threat to the financial stability of the United States itself.

    This is not hyperbole and, given this, it’s not really surprising that the priorities of the central banks lean in the direction they do.

    • Hi BobJ

      As it is Shakespeare’s 400th birthday or so of let me use his words from Queen Gertrude in Hamlet.

      “The lady doth protest too much, methinks.”

      A bit like Queen Gertrude the public words of the Fed are not what it really means. It is as attached to the precious as Gollum is in The Lord of the Rings.

  6. Thankfully in my industry as a mortgage broker the excesses that caused the credit crunch and a lot of the over reaction to that have now faded and the industry is being allowed to grow again.

    At long last I feel as though i can actually perform a function for my clients again.

    http://www.themortgagetest.co.uk

    • Hi tmtgeoff and welcome to my website

      How do you answer the challenge that many of the same issues are re-appearing again? Also if we just keep lowering mortgage rates we are trapping ourselves in a spiders web surely.

  7. The refusal of the powers that be to admit the system is failing is criminally irresponsible.The evidence is clear QE NIRP ZIRP threats to eliminate cash,rumours of helicopter money.
    The game is over is only a matter of when.The Banksters and the corporatocracy own the politicians the sheeple are being fleeced.
    The 1 percent are paying themselves more and more why would they want such a system to end ,so they will stop at nothing.
    Every market is rigged Deutsche Bank is the latest bank to admit criminal activity manipulation of the gold and silver markets,banks have redefined the term organised crime.
    Those guys who broke into the safe deposit boxes in London were jailed and vilified by Her Majestys finest they were small fry,the Banksters how many of these serial criminals involved the theft of billions have been jailed.You know the answer
    The politicians bankroll these criminals with taxpayers money heads they win tails we lose too big to fail then why have our elected representatives not broken them up and put them in a Glass Steagal cage.
    The Central Banks are not independent they are Government controlled or in some cases they control the Government either way their aim is the same keep the ponzi scheme going free market capitalism what a fraud…criminality on the greatest level in history.
    The people are asleep distracted by Football invented by Sky in 1992 did you not know there was no football or sport before then…nothing new under the sun …the Romans bread and circuses.

    • ‘Every market is rigged Deutsche Bank is the latest bank to admit criminal activity manipulation of the gold and silver markets,banks have redefined the term organised crime.
      Those guys who broke into the safe deposit boxes in London were jailed and vilified by Her Majestys finest they were small fry,the Banksters how many of these serial criminals involved the theft of billions have been jailed.You know the answer’

      A great post and perhaps a reflection of why the retail investor has been so absent over the last few years.

  8. Well said Shaun. The history of the GFC should not be forgotten. I’ve seen a couple of pieces in MSM recently which claim interest rates were slashed to historic lows to shore up the economy. The cheek of it. One day TPTB will tell us this was all our fault.

    How long is this going to go on?. 7 years already – though I guess the crisis really started when BNP revealed they were having trouble valuing 3 of their funds (August 2007 ??)
    I guess that shows us just how bad things really are at the banks. Will it ever end?

    My neighbour says it ended in 2009 – we just haven’t been told yet.

    • The banksters are in denial. It will probably take another “unexpected” market event to end this charade. For example a governmental bankruptcy and/or currency meltdown is hard to ignore / deny / pretend it doesn’t exist ….

      • ‘The banksters are in denial. It will probably take another “unexpected” market event to end this charade.’

        The denial goes further than just the bankers.It’s the academic economists, the political class and a pliant MSM as well.

    • ‘I’ve seen a couple of pieces in MSM recently which claim interest rates were slashed to historic lows to shore up the economy.’

      So sad that this myth is passed off as truth by the MSM.

      IR’s were slashed to save the banks from facing the consequences of their own misjudgements.

  9. As others have commented, bank fraud is not treated like a crime. The great train robbery reportedly netted 2.5 million – about 50 million in today’s money. This is small change in comparison to the RBS subsidies ……

    • Hi ExpatInBG

      In many ways it is exactly the reverse as many of those involved in bank crimes remain in position. Or in the case of Victor Blank even the most disastrous business decisions seem not to matter in official land.

      • Indeed. A blank cheque from ever suffering taxpayers is a fatal flaw in state run business. Seems Britain has failed to learn from British Leyland and is repeating the same error with RBS.

        • Hi ExpatinBG
          At least BL/Rover Tata/British Steel produce a product the Banking industry just produces debt and huge salaries for those at the top.Bob Diamond formerly of Barclays earned £60M a year before he was found out why it took so long beggars belief.Barclays would have been RBS if it had not been run by someone wiith the opposite of the Midas touch Mr Goodwin.
          These two fools went toe to toe to buy ABN Amro ,when the music stop Goodwin and RBS were left holding the debt bomb but it could easily have gone the other way

        • Hi Private Fraser,

          The banking industry does perform real functions. Stock markets for retirement savings (huge is the US), bond markets allow governments and corporates to borrow more cheaply than otherwise possible. Hedging – the process of allowing airlines to fix their fuel costs or farmers to have predictable incomes is a useful service. I regard the IEX exchange as a good actor. But there are many bad actors – some of whom live the high life off public money, some of whom IHMO act fraudulently.

          I regard RBS as a failed business that is not worth saving. Likewise, BL wasn’t worth saving – just compare the Austin 1300 to a datsun 1200. The 240z was reliable and great to drive, much better than anything BL sold. In 2009 the US car industry got the TARP – which now has been repaid. I distinguish between loans that help a viable business through a tough spot and unviable failures which are just a bottomless pit for throwing good money after bad.

          The private car industry in Britain is healthy. Ford, Nissan, Honda, mini etc. They create employment, pay tax and contribute to the country. We should apply the same discipline to banks – shut down the failures and have the rest contribute. IE pay tax to the treasury

  10. I’m sorry Shaun, but I believe you are wrong about CB interest rate levels being about exchange rates.
    An economy like Sweden’s which is expanding has no need for currency wars.
    It may superficially seem like a currency war, but it’s not.
    What is happening, imv, is that everyone WANTS to push their interest rates as low as they can, but there’s certain to be an optimal lower bound, beyond which deposit withdrawal makes further cuts self-defeating.
    One or two smaller economies, which are doing well, and which can reverse cuts quickly, are leading the way downwards, with others following, if the likes of Sweden “get away with it”.
    This also explains, again imv, why recent interest rate cuts have been so small as to be irrelevant in the wider economy, that’s not their purpose, it’s about testing the boundaries.

  11. Shaun,

    You often criticise GDP as an indicator. WEF suggest an alternate set of measures. https://www.weforum.org/agenda/2016/04/five-measures-of-growth-that-are-better-than-gdp?utm_content=bufferf92ea&utm_medium=social&utm_source=linkedin.com&utm_campaign=buffer

    Generally I agree, but they need to add accountability and the rule of law. Exemptions for MPs is a sign of a corrupt failing society. Anybody who cannot have their financial affairs put to public scrutiny should be disqualified from parliament.

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