These days so much of economic life revolves around the banking and finance sector. The political class tied the knot even more closely with the bailouts and supportive monetary policies that began in the UK with Northern Rock in 2007. That of course is quite a few years ago now even though it feels like yesterday. Internationally there are plenty of issues especially in places like Italy where there has been very little attempt to address the problems created by 360 billion Euros of bad loans leading to a drip drip drip of bad news. A sign of the ongoing problem was provided by the US Federal Reserve last night.
The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. because of broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations.
So the United States has provided a shot across the bows for two major European banks and perhaps this is partly why Mario Draghi has started talking about “vulnerabilities” rather than “resilience”. UK readers will note that Santander has a large operation in the UK and wonder about that. I was critical of the takeover of Abbey National and other building societies back at the time. Please do not misunderstand me this is not anti-Spanish in any way and I had no issue with Santander buying assets here it was the amount of them that posed potential problems.
My old employer is something of a goliath in the German financial system but the goliath has increasingly become a problem child. A factor here is the large derivatives book which has seen all sorts of large estimates for its size. I think the largest I have seen is US $64 trillion but care is needed here as these are a past speciality of mine and valuations depend on circumstances. If a bank writes derivatives what it does not need is extraordinary events, have we seen any of them in recent times? You get the idea….
The International Monetary Fund weighed in yesterday on the German banks in general.
However, German banks’ business models are vulnerable to low interest rates. This is because most German banks have businesses based on maturity transformation with a large number of branches and high overhead costs. Net interest income is the most important component of their profits.
Not so easy when they have so far been unwilling/unable to pass on the -0.4% deposit rate of the European Central Bank (ECB).
So far banks have proven unwilling, or even legally unable, to pass on the negative interest rates to depositors, while their assets have recently started to reprice to lower interest rates.
Then it lands its punch on Deutsche Bank.
Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse……..The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime.
The share price has responded by falling another 3% this morning and of course this comes in addition to a stream of falls. A price of 12.32 Euros gives a year to date return of -45.7% according to Bloomberg and its market capitalisation is now a mere 16.8 billion Euros. That of course means that any share issue to strengthen capital would be expensive.
This is the other German institution that was identified as globally significant by the IMF. As it is an insurer it is subject to the critique of negative interest-rates which I express regularly on here. How do long-term business models for insurance products, pensions and annuities work with an official interest-rates of -0.4% and a 10 year German bond yield of -0.11%?
For the German insurance sector as a whole how is this one going?
guaranteed return life products playing a dominant role
Also what could go wrong here?
Some evidence of search for yield has
If we step back we see this from Morgan Stanley with thanks to @Fmirw
The Eurostoxx banks index still trades 20% below pre-Brexit levels. This index has halved since the start of the year.
Leverage within EU banks is high and with domestic returns on assets falling (lower growth potential), balance sheet consolidation is warranted.
The implication here is that there will be even more deleveraging. It was only a few days ago I pointed out that Oliver Blanchard who used to be chief economist at the IMF was wrong to say that phase was over.
The Italian Job
I am grateful to @lemasabachthani for pointing this out yesterday.
RENZI SAYS HE HAS MADE ITALY BANKS `SECURE’
That is clearly a hostage to fortune as the word secure goes into my financial lexicon for these times. Meanwhile the rumours about another bailout continue except of course they are prohibited by the new bail in rules in the Euro area. Oh and the bad bank Atlante which only a few short weeks ago had saved the Italian banks according to finance minister Padoan seems to be on the list for ch-ch-changes.
ITALY GOVT WORKING ON PLAN TO RECAPITALISE ATLANTE FUND TO HELP BANKS FOR 3-5 BLN EUROS BEFORE SUMMER BREAK – GOVT SOURCE
Just as a reminder this uses private money.
TALY GOVT IN CONTACT WITH PRIVATE PENSION FUNDS TO SEEK CONTRIBUTIONS TO ATLANTE; MAY ALSO USE TREASURY’S SGA COMPANY AND STATE LENDER CDP –
If you look back to my updates over the past few days you will see the considerable problems with such a plan. One of Baldricks from Blackadder I think.
The US Cavalry
There was a sub-plot to the US Federal Reserve stress test results last night as there was then a barrage of responses. If I show some you will get the idea.
JP Morgan announce share buyback of up to $10.6bln up to 2017……..Bank of America announce share buyback programme of $5bln, plans to increase quarterly dividend to $0.075………Citi announce buyback programme of up to $8.6bln, quarterly dividend of $0.16/share
I think in total it came to around US $45 billion in buybacks plus some dividend increases. A type of mini QE4 for the United States and an effort to pull away from banking troubles elsewhere.
The official view was put by Gillian Tett of the Financial Times on Newsnight on Tuesday night. The view was that the bank reforms and changes had in fact meant that the banks have survived Brexit. I was left with the thought “so far” as of course this is a situation where things are always okay until in a “surprise” they are not. Whilst UK banks are stronger in capital terms we invariably find in a real crisis that they still have too little of it. Here is the view of Bank of England Governor Mark Carney.
UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
One other thing that Gillian pointed out what that the US banks feel they have won the war. Such proclamations are dangerous as we know the whole system is so interconnected but we do know as I have described today that there are plenty of problems in the European banking system.
Meanwhile there was this announced today. From the Guardian.
United Overseas Bank said it would “temporarily stop” issuing the loans because of heightened uncertainty following the Brexit decision.
They mean mortgages in the UK. This made me think of the Nine Elms and Battersea Power Station developments near to me which had been advertising in that geographical area. It also made me think that in Singaporean Dollars UK assets are now around 10% cheaper than they were. Good for new buyers but it may be that the fall in value for existing owners in Singaporean Dollars has worried the banks risk mangers.
As to lyrics well I guess many of you are singing along to ABBA right now.
What’s the name of the game?
Does it mean anything to you?
What’s the name of the game?
Can you feel it the way I do?
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