A major theme of the credit crunch era has been the banking crisis in so many places followed by the many bailouts under the Too Big To Fail or TBTF strategy. The catch is that this week has seen more signs of distress for various banks more than 8 years after the collapse of Lehman Bros which by definition shows that the strategy such as it was is continues to fail. What is supposed to happen is that the can is kicked into the future via the bailouts and then we pick the can up later in better times. Indeed in the past central bankers have been able to bask in the reflected glamour of a successful intervention.
Economic policy has been warped to suit the banks
It bears repeating that the economic response has been more for the banking sector than the real economy. The initial slashing of interest-rates benefited them and the proliferation of QE improved the value of their bond holdings. Also in a rather transparent move countries cut interest-rates to a lower bound for their banks. What I mean by this is that the Bank of England stopped originally at 0.5% because it was afraid that the creaking IT systems of the UK banks could not cope with any negative numbers.
More recently we have seen blatant subsidies to the banking sector. The UK started one this week which is the Term Funding Scheme where UK banks will be able to borrow up to £100 billion at an interest-rate of 0.25%. This of course follows on from the Funding for (Mortgage) Lending Scheme which not only gave then cheap finance but boosted one of the main assets house prices. Only yesterday the Bank of Japan warped its buying of equities towards an index in which banks are more strongly represented. The TOPIX bank index rose by 7% on the day.
Also banks are often excepted from negative interest-rates either by also being given money at the negative interest-rate ( i.e even better than free money) like the TLTROs of the European Central Bank or simply being excluded from them like in Japan. Actually the -0.1% interest-rate there is more honoured in the breach than the observance.
A big gain for banks is rising house prices a subject I have covered extensively in the UK. This week has given us some news on this front from the Euro area as some countries respond to all the monetary easing. From Netherlands Statistics.
Prices of owner-occupied houses (excluding new constructions) were on average 6.0 percent higher in August 2016 than in August 2015. This is the most substantial price increase in 14 years.
And on Tuesday Portugal Statistics joined the party.
In the second quarter of 2016, the House Price Index (HPI) registered an increase of 6.3% when compared to the same period of the previous year….When compared to the first quarter of the year, the HPI increased by 3.1%
Now these are only 2 of the Euro area countries but we do get a clue that the picture has changed for this major part of banks asset books.
The Bank of England has summed up the situation only this morning.
Market valuations of major UK banks remain, in aggregate, well below their book value.
This poses a direct problem for the TBTF strategy as the investments of the UK taxpayer are currently well underwater especially in the perpetually crisis ridden Royal Bank of Scotland. It symbolically has fallen another 2 pence today to £1.81 which compares to a peak over the past year of £3.34. With the travails of the world shipping industry it was sadly typical to find the accident prone RBS affected. Lloyds Banking Group at 56 pence is also well below the price at which the UK taxpayer invested although some of the shares were sold in better times. Whilst HSBC for example has done much better in share price terms the two main bailed out banks have hit more trouble after all these years. Also there is an implicit admittal from the Bank of England that it is still providing a subsidy.
bank funding costs remain significantly lower than during previous episodes in which market valuations have been well below book value.
The topic du jour in banking and semaine and mois. For all the official proclamations that everything is fine we see rumours continue to circle particularly about the derivatives book. Yesterday its share price fell back close to its lows again and whilst it has rallied today the current price of 11.44 compares to a high of 27.98 Euros over the past 12 months. It faces a conundrum where it would like more share capital but that is increasingly difficult due to the low share price. A vicious rather than a virtuous circle is in play as represented by this from Bloomberg.
Leverage ratio — a lender’s capital measured against its assets — at Deutsche Bank lags behind the rest of the world’s major banks, according to data released Tuesday by Federal Deposit Insurance Corp……While it’s not an official scoring by the FDIC, Hoenig’s calculations put more emphasis on derivatives exposure,
There are obvious issue such as the upcoming fine over mortgage miss selling in the US. It is likely to be a fair bit below the US $ 14 billion mooted but none the less Deutsche could do without it right now. Of course it has not actually been bailed out except implicitly but we have to ask how it has such problems 8 years down the road.
Monte dei Paschi
The world’s oldest bank seems like an old friend on here now. It was only a few short weeks ago when we were told that everything was on its way to being fixed and yet yesterday Reuters reported this.
Monte dei Paschi shares fell for eight sessions in a row, shedding 26 percent of their value, after the unexpected resignation of CEO Fabrizio Viola on Sept. 8 added to uncertainty over the lender’s future.
This particularly matters right now because it does this.
a string of losses that have shrunk the bank’s market capitalisation to one ninth of the size of a planned 5 billion euro (4.31 billion pounds) share issue.
You get an idea of the scale of the change as I remember making a mental note that it was one fifth back then as opposed to the one ninth now. Ouch!
If we move to the wider issue of the Italian banking sector it is true that the Non Performing Loans look like they are topping up. The problem is that share prices and hence bank capital have fallen much more quickly.
As time passes it becomes ever more glaring that many of the banks were not fixed but simply patched-up and told to carry on. It is not just a European issue but that area is making the news right now with Fitch pointing out problems for Portugal earlier today a subject I covered on the 25th of July.
But asset quality is still a major weakness for the banking sector and, in our opinion, makes banks vulnerable to downside risks from the highly indebted Portuguese economy. The unreserved portion of problem assets exceeds 100% of capital at CGD, BCP and Montepio.
Indeed there was not much sign of European solidarity in this reported by Reuters about Italian Prime Minister Renzi on Monday.
Italian Prime Minister Matteo Renzi said on Monday that Germany’s central bank chief Jens Weidmann should concentrate on fixing the problems of his own country’s banks, after Weidmann had urged Italy to cut its huge public debt.
Renzi told reporters in New York that Weidmann needed to solve the problem of German banks which had “hundreds and hundreds and hundreds of billions of euros of derivatives” on their books.
So after all these years the words from Alice In Wonderland sum it up well.
In another moment down went Alice after it, never once considering how in the world she was to get out again.
Me on Tip TV Finance