Brexit poses yet more questions about the banks

There is much to consider in the changes and fallout after the UK voted to leave the European Union on Thursday. However there are international perspectives and one of the themes of this blog has been singing along to ABC this morning already.

Shoot that poison arrow though to my heart
Shoot that poison arrow

Yes the Italian banking sector which I warned about again only on Friday posting a chart from Sober Look showing the share price declines seen recently including 22% that day. So far this morning there has been a small rally so panic over? Well when you see why they have stabilised there is a clear issue. From Bloomberg.

The government is weighing measures that may add as much as 40 billion euros ($44 billion), said one person, asking not to be identified because the talks are private. Italy may support lenders by providing capital or pledging guarantees, said the person.

Well not that private! We are reminded one more time that official vessels are leaky ones. I also note the “pledging guarantees” which is usually a scheme to try to keep the money off-balance sheet and therefore out of the national finances. An obvious issue if you are a country with slow economic growth and a national debt of 132.7% of GDP (Gross Domestic Product) at the end of last year. Another issue here is the way that private losses ( the Italian banks have around 360 billion Euros of bad debts) look like they might be socialised and handed over to the Italian taxpayer. We have seen before that the estimates of such a move rise ever higher in what is presented as a “surprise”.

Regular readers will recall that I have long argued that Mario Draghi will use some of the ECB monetary easing to help the banks he used to supervise. Friday brought some news about this as Reuters reports.

Italy’s top thirteen banks took up over a quarter of the 399 billion euros ($442 billion) in super-cheap loans allotted by the European Central Bank in the initial round of Targeted Long-Term Financing Operations……….Net additional liquidity injected by the TLTRO on Friday was equal to 32 billion euros and Italian banks took up over half of it, or 16.25 billion euros.

As we look at such numbers we can look for comparison at the still relatively new bad bank called Atlante. It raised some 4.25 billion Euros of capital which looks rather thin compared to the challenges ahead to say the least. Also before all of this it was being asked for help again. From Bloomberg last week.

Veneto Banca SpA’s shareholders spurned its initial public offering, signaling that Italy’s new rescue fund will probably be called upon to assume control of a second lender.

Retail investors bought just 2.2 percent of 1 billion euros ($1.1 billion) in stock, the Montebelluna, Treviso-based lender said in a statement Thursday.

There was a chance that institutional investors would buy on Friday but of course in that days melee they would have regretted it if they had. I will move on but just point out that the situation is frenetic as share prices which were up are now down which frankly just like the rumour mill is a sign of what a mess this is.


The UK day opened with various statements from Japan. There were of course plenty of issues pre-existing there including the new stronger phase for the Yen with the Brexit result gave a push to. So far it has mostly been open mouth operations but one bit seems to be building in volume.

Japan Govt Mulls Boosting Stimulus Package To Over JPY 10 Tln — RTRS ( @livesquawk )

Oh and some are pressing for more monetary easing which of course has a credibility problem with the implication that the enormous amount provided so far was and is not enough. What we are seeing is how tightly strung the supposedly recovered world economy is.

Something extraordinary

This is something that like the 0% yield for the benchmark German 10 year bond yield has felt like it has been coming for a while.

UK 10-year yield drops below 1% for the first time ever ( @FerroTV )

If we move to longer dated yields we see that the 30 year yield is now 1.82%. Both of these are SIMPLY EXTRAORDINARY and the use of capitals is deliberate.  I can recall the benchmark UK Gilt yield which back then was between the two (15/20 years) being 15%. It reminds me of the discussion on the 10 th of June. I was writing about negative yielding bonds then but much of this applies to the very low yields the UK now has.

Negative yielding bonds provide quite a windfall for fiscal policy. There is a flow one which the media mostly ignores but there is the opportunity for a capital one should the 3 main beneficiaries use it. It is not quite a “free lunch” although it would be for a while a lunch that you were paid to eat. What I mean by that is that the national debts would rise and also the bonds would as a minimum have to be refinanced in the future and maybe in some sort of alternative universe – the sort of place where Spock in Star Trek has emotions – be actually repaid.

So thoughts?

Such yields will also spiral through the economic system so let us remind ourselves of two of the main consequences. Firstly there is the problem for the business model of pensions and longer-term contracts which has been oiled for years by positive interest-rates which have shrunk dramatically. On the other side there are mortgage-rates which have been falling and if this position is sustained look set to fall again.

Whilst Brexit has been the trigger here in the short-term it is also true that yields have been falling across much of the world for some time now. Indeed if you look at really long-term trends for around 30 years or so.

The banks

So often we find ourselves returning to the banks which we keep being told have recapitalised and are in central banker speech resilient. From Bank of England Governor Mark Carney on Friday.

These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.
The capital requirements of our largest banks are now ten times higher than before the crisis.
As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
Yet we find that each time there is financial market trouble they are at the forefront of it.

Overall I think that he did the right thing on Friday morning as a central banker should in response to a clear change in so many areas. However there is a sub-plot which is like with the Forward Guidance debacle where reality undermines bluster. From the Financial Times.

Shares in RBS and Barclays were briefly suspended this morning after falling more than 8%.

Ah yes the RBS which needs fixing every year and has been about to turn a corner for at least 6 years now. But as we look around the financial world we see so many names familiar to my analysis on here. Let us pick one which is down 7% today.

Deutsche Bank shares are down 57% over 12 months. ( h/t Patrick McGee )

This reinforces this from Friday.

Charlie Bilello, CMT ‏@MktOutperform Jun 25
Deutsche Bank ADR, Friday
1) All-Time Low
2) 88% below ’07 peak
3) 2nd highest volume
4) Worst decline since Jan ’09

As Taylor Swift would put it.

I knew you were trouble when you walked in

But here is another factor which is that Deutsche Bank expects that it will always be bailed out by Germany. So there is a sort of stop-loss for it but of course there are all sort of problems as I was reminded earlier.

EU’s Bank Recovery & Resolution Directive – outlaws further state-funded bailouts of failing banks Ref p514 ( h/t Mervyn Randall )

Rock meet hard place.


There is so much at play and as ever let me avoid any specific politics. However the UK political establishment has managed to under-perform even my very low expectations. Of course they are intertwined these days with the banks and the bailouts and I would point out again how fragile the confidence is in the banking system that we keep being told is fixed or rather “resilient”. But take care as the central bankers have backed the banks at every turn so far and I cannot help thinking of the “no limits” phrase of Mario Draghi.

Also I have seen market panics before like for example as a young man when the UK left the ERM and one thing I do know is that proclamations of certainty about the future are often out of date that week if not day.  I also know that it will not stop people from making them. Just like markets so often re-test their lows.



41 thoughts on “Brexit poses yet more questions about the banks

  1. HAHAHAHAHAHAHA at Barclays – they thought the housing market could be regulated, when i queried their strategy 15 months ago and got fired for daring to do so.

    i would nominate a song much beloved of football fans to the tune of the Village People’s ‘Go West’ to sum that shower up.

    I will make these predictions:

    1) house prices will be falling by mid-2017

    2) Barclays and RBS will report lots of red ink in their mortgage books from summer 2017

    3) Barcl;ays will cancel the Digital Eagles programme.

    It could not happen to a nicer bunch of …..

    • You could not make it up: The main Barclays Twitter account has nothing since a statement by Jez on 23/6.

      Meanwhile what is the connection between David Cameron and Barclays UK? (Well okay, apart from both being useless) Both have spent more time worrying about gays than the UK economy and relationship with Europe.

      Not sure even Stonewall would say that was the right set of priorities!

  2. yes I remember those days as well

    15% mortgage rate , I was fortunate to be in a well paid job but it was tight. Some friends really did give their keys back

    oh and they have done very well thank you and are BTL’ers now (!!)

    today I see damage limitation is going on , still we were not in good shape before the vote anyways

    MIRP was always a proposed policy


    • Hi Forbin

      Back then it was the days of mortgage subsidies in the City which were very valuable at such interest-rates. It speaks of a complete difference in house prices when there was I think a cap at £100k or 4 times salary. That was useful back then and could be quite a bit of someone’s pay.

  3. Well I don’t know about you Shaun, but I’ve taken quite a lot of cash out of my Sterling and Euro bank accounts, just in case the ATMs stop working.

  4. Hi Shaun
    How very true your last para is!
    Once the predictably childish behaviour of politicians of all colours dies down. When the Euro bureaucrats and some national leaders realise the UK now has an ‘option’ that it can play entirely at its own behest. When the media find something else to concentrate on. Something along the lines of a ‘Liechtenstien’ arrangement will be cobbled together, a little bit of everything for everybody ( and a bung to the French to go along with it).
    Then its back to business more or less the same as before, but slightly less interference from Brussels and Strasburg.
    In the meantime anyone who is influenced by the very short-term gambling on the FX or stock markets needs their heads examining. The much longer term trends of the bond markets and NIRP are very troubling, as you say, with investments and pensions being put at the risk of collapse by the idiocy of ‘group think’ by the CBs.

  5. Hi Shaun
    Thankyou for a factual piece in an
    illogical world,
    My thoughts on negative yield bonds
    are that it is assumed that anything lower than -2%
    would trigger a reaction from savers, but to me that
    is an unknown until it happens. If rates continue to
    go deeper into negative territory would Joe Public
    be offered them as some sort of reverse helicopter
    money? Hyper inflation is the only other course that
    I can see which might force TPTB to face reality but
    how can that happen when they have control of
    their respective central bank’s? Even if ALL bank shares
    become worthless, there will always be idiots determined
    to continue to plumb ever greater depths of insanity.
    It’ the end of the world as we know it, REM


    • it would not take a BIRP of -2% to cause a bank run

      I submit even 0.2% would do it

      MIRP/BIRP between countries and CB are sign of desperation , if ever they get loose in the high street …..

      And I am sure CB and the TBTF banks are fully aware of that, hence we may just see tenths of a percent positive interest …….
      then bail ins !


      PS: looking a bit tight for that 2018 recovery and it will be alright talk back in 2008

      now they have an excuse ….

      • Hi Forbin
        I was not singling out the UK
        but on a world basis we already have
        -0.7% and I do not see bail ins from
        any nation or group of nations with their
        own CB. Iv’e frozen my popcorn for
        tonight’s match!

    • Hi David

      Thanks for the song, after the football I needed a bit of cheering up. I had forgotten about the housebuilder’s swaps which explains why they were hit hard on Friday. How exposed do you think our banks are?

      • Barclays are severely exposed – remember their latest desperate wheeze was 100% mortgages if the Bank of Mum & Dad put up a 10% guarantee. They limited themselves to 4.5x in 2015, but moved up to 5.5x with the new scheme. I suspect they also have more risky loans than Lloyds and others, as those have been more cautious. RBS was supposed to be the engine of business lending, but most of its lending is on mortgages and in May 2014, its mortgage book had passed £100 billion! Pretty obvious where the market thinks property is going.

        When the Govt came up with “Help to Inflate prices” that also built up huge exposure for public funds. The buyer puts up the top 5%, then the lender offers 95%, but the top 30% is guaranteed by the Govt. When this started, my local authority decided they were going to offer something similar and I wrote to them, asking if councillors would cover any losses. I was assured that the scheme was set up so that losses wouldn’t happen. I suppose this is just the Govt cutting out the middle man by having to pump capital into itself this time.

        Basically, a 10% drop in prices and there will be blood all over the carpet and up the walls. Was it just 13 months ago that i predicted this? Well, call me Mystic Dave!

      • I don’t know if it will cheer you up but apparently Moodys and S&P have just downgraded the English football team to LOL.

      • Sorry, my mistake on Taylor Wimpey – they were looking at debt for equity, but went for a big rights issue in 2009 to pay down debt significantly. The banks’ big exposure is more mortgages then.

  6. Hi Shaun,

    An excellent and timely post.

    RBS and Barclays seem to be taking a bit of a share price hammering today.

    As bonds trend towards negative interest rates, if this is followed by bank interest rates for deposits, at point point do people start withdrawing cash and cause a bank run?

    This report by Weiss on bank ratings is timely as weak balance sheets, bad debts and bank runs are a potentially toxic combination, especially for Europe with is concentration of D rated banks!

  7. Hi Shaun

    Just caught up with your Friday blog and was pleased so many people
    became involved.Would be nice to see some ladies joining in.
    Your blog today looks so familiar but I’m sure you will be writing a lot more about banks,government bonds along with UK in the months ahead.
    Just wondering what the yield is on the two one hundred year bonds that were issued some
    months ago.
    Hoping Roy’s boys will not vote to leave tonight.

    • Hi Midge

      We do have some who comment but if you have any suggestions as to how I could make it more female friendly please suggest them. Sadly Roy’s boys added to my lexicon for these times as they were according to him “fantastic” and “talented” and “hungry” on their way home.

      I have tried to look up the 100 year bond for Ireland but its stock exchange is not listing a price I can find.

  8. Hi Shaun. I’m afraid we cannot ignore the politicians this time .
    I have just been listening to the commons on the radio.
    Cameron is being lauded laughing and joking as though he’d didnt have a care in the world.This man has just created the most catastrophic economic and crisis in living memory and nobody is blaming him.
    Yet Corbyn is being blamed by the clowns and warmongers he has the misfortune be saddled with..
    I feel as though I have arrived in a parallel universe.
    Despite the best efforts of Shinzo Abe to trash the Yen it is being referred to as a safe haven.
    The banks share prices are in meltdown Deutsche Bank 12.54 euros and so called Investors Continue to invest in negative yielding bonds
    Whatever happens the tax payers will be told to bail out these Zombie Banks but what if it is to big to save?
    Incredible….this stuff defies all logic what am I not seeing the king has no clothes.

    • Hi

      It could and may well be worse (not due to brexit) but with negative interest rates there is a risk that people loose faith in money

      There seams to be no one really addressing the issue.

      I am to young to remember but was the oil crisis of the mid seventies worse and remember we had to be bailed out by the IMF

      • Hi Thepessimist

        No it has never been as bad as it is now the economy is built on foundations of debt and those foundations are cracking under severe overloading.
        It is only a matter of time before the the debt and derivatives causes the collapse of the global Ponzi scheme economy.
        Sorry can’t be more optimistic than that.

  9. The world is going crazy these days with wild swings in the markets that really do not relate to the risks involved. I think many investors are concentrating on the return OF their money rather than the return ON their money hence the attraction of negative bonds. What i cant understand is why central banks think that more liquidity is required when the world is awash with it? Likewise, i don’t see why cutting rates from 0.5% will help? The problem I see is one of the downsides of instant communication, internet trading and very low yields wherever money is placed. Investors will move huge sums for even the tiniest of yields or the slightest threat when in the past they may have been prepared to accept a slight movement either way without a response. The effect is rather like people rushing from one side of a boat to the other and back again. Lets just hope they dont capsize the entire financial system!

  10. I see we’ve opted for double Brexit helped by Iceland. At least they can give us football advice as well as life after a financial meltdown!

    • Hi Pavlaki

      Iceland were one of the few places to congratulate us on Brexit. Perhaps they were just softening us up before the football! Also another resignation as Roy Hodgson goes….

      I think you make a good point about about an inverse effect of ever lower yields. It makes people worry even more about their capital and risk goes higher not lower.

  11. Simple question (I hope) to answer (at least with a theoretical answer), am I correct in thinking that the trade-off in terms of house prices is: increase – driven by lower rates, limited supply; decrease – driven by reduced foreign investment? It’s the decrease I haven’t wrapped my head around yet…

    Surely one of the few positives to take away from the Brexit scenario is that the Pound can devalue independent of the Euro – unlike the poor Greeks who I believe still need to default and exit realistically?

    • House prices are a consequence of monetary policy. In terms of rates, it is quite simple: If you £1000 to pay out each month and say, it is £900 for the capital and £100 for the interest, then if rates rise and interest takes £200, then you only pay £800 in capital and thus the capacity to pay is reduced. It is essentially the same in terms of credit conditions, if for example the multiplier on pay is changed. Supply and demand is not relevant – unless someone can tell us about the mass emigrations leading to the falls of the early 90s and 2008-10 (you will spot these were periods of higher rates and reduced credit availability respectively.

      The GBP can devalue, but it does not address the issue. The Greeks will have to engage in internal devaluation – either they accept lower rewards for their feeble efforts or they do some work. That is economic discipline.

      • Hi David,
        Thanks for your reply, I follow the logic of the increase regarding capital/interest trade-off but what about a decrease? How can we expect to see a house price decrease at the same point as falling rates? Is it because of the recessionary nature of decreased demand through higher unemployment, lower real rate rises?

        If I simplify this down to:
        Rates rise and houses prices rise: potential drivers?
        Rates rise and houses prices fall: decreased affordability, greater incentive to save
        Rates fall and house prices rise: increased affordability, less incentive to save
        Rates fall and house prices fall: potential drivers?

        Thanks again for any help people can lend in developing my understanding 🙂

        I know Shaun has made the point here that the accepted assumption of lower rates driving increased spending can be shown not to be true due to reduced consumer confidence – as evidenced in Scandinavia..? But this is somewhat of an aside to my question!

        • I thiink it boils down to the availability of credit. If mortgages are easy to come by especially with government “help” ie HTB then prices rise. If the taps are turned off or the conditions for obtaining a mortgage are tightened then prices fall.

          This happened in 2008 when prices started to fall then HTB came in and magically the falls stopped.

          It has very little to do with supply and demand except perhaps in London.

          Most people only look at the monthly payment so if IRs are low they borrow as much as they can (interest only if they can get it— the buy-to-let model) and they don’t think about the long-term ie how are they going to pay off the capital or what happens if interest rates rise.

        • You will rarely see rates and house prices move together, because of the interest/capital ratio changes. However, it might happen as Jan points out if credit conditions work the other way – such as low rates, but tight credit more than offsets (eg: the multiplier being reduced). It is also worth bearing in mind that rate moves take time to work through as there have to be enough buyers in the new conditions to affect prices, so many economist work on a 1 year to 18 months time lag, which is why BoE rates are set on a 2 year forecast (or guess to be accurate). If you take the example of Northern Rock with its infamous 125% mortgages, that lot crashed in September 07 when rates had increased from a low level in August 06. The credit contagion spread into mid-08 when Lehmans crashed and closed off much of the credit markets, just when house prices were falling from the 06-07 rate moves and some credit availability reductions. Rates were crash stopped in mid-09 and so, from 2010, the bubble restarts inflating.

          There is also the liquidity trap – the point at which rate changes make no difference to demand consumption. When rates are high, a reduction releases cash for spending and so, should stimulate the economy. When rates are at or below the liquidity trap level, there is no real change to consumption (you can only eat so much food etc.) as all the newly-spare cash disappears into assets. After Japan’s stagnation, this level was thought to be around 0%, but i have always had the view that the UK level is about 4% (Europe and the US more like 2.5%). So, once you go below that, rate changes do not affect consumption and thus do not boost the economy. Sustained periods of low rates thus pump up asset prices, which is why Japan has stagnated and the West has done so badly since 2009. The consequence is that more capital has to be borrowed to buy assets and the capital cost will not be of course affected by rate changes. So, you are then lumbered with broken consumption.

        • Anyone who relies on supply/demand arguments (especially those clowns in UKIP) needs to play Monopoly with slightly changed rules, so that fines and the like go into the centre and are “won” by the next person on Free Parking. That of course pumps money to the players and leaves the Bank short (unless you print more Monopoly money – pun intended!) – but here, there is no more supply or demand, yet watch what happens to property prices.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.