How are our banks still in so much trouble?

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.

House prices

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.

UK Banks

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.

Deutsche Bank

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.

Comment

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

 

 

 

 

 

 

 

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25 thoughts on “How are our banks still in so much trouble?

  1. “But asset quality is still a major weakness for the banking sector ..”

    why ?

    after all the QE and assets being pumped up , shares too ?

    and our best “experts” , being paid a fortune, cannot find a solution ?

    then I say we let them go…… ( que Disney Frozen song…..)

    Forbin

    • Hi Forbin

      That is an extraordinary phrase this far down the line is it not? Especially with all the bailouts that have taken place in Portugal’s banking sector.

      Meanwhile Reuters is reporting this tonight.

      “European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses.

      Less than two months after the Tuscan lender announced an emergency plan to raise 5 billion euros of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short.”

      How many bailouts can one bank have?

  2. Maybe I’m not qualified to make sense of all this: but if there is any rhyme or reason to it, then it must all be geared to saving the banks. Which begs Forbin’s question ,above, how come, after so many years of support, they are not yet saved?

    Does the answer lie in the area of derivatives (and the reference to Deutsche Bank’s derivatives book? Could it be that the potential exposure of the banks to these risks piled on risks is so huge that they have still not been able to unwind them?

    If so, then we can expect the current exceptional measures to go on until they are able to do so – and someone in the know should be able to put a time frame to that.

    Any ideas?

    • yes

      1, re-enact Glass-Steagall Act

      2, make it an offence for any politician to hold a job in the banking sector after leaving office – ever

      3, give special provision that the Banks CEO and board is responsible for all losses for the past 25 years in that the bonuses made are repayable , or go to jail . include a clause that if they live in a house of their wives ( often used to avoid tax and avoid loosing the family home) then they will have to mortgage it or move to a smaller council house ……

      and to revoke their pensions as well above 150K pot size.

      4, remove the tax haven incentive by stating if country B uses 15% tax rate and ours is 40% , then by all means pay the 15% to country B but you still have to pay the difference to the UK, ie 40%-15% = 25%

      I’d also add that all zero hour contracts as far as the HMG goes are paid at minimum wage for 40 hours and ergo your company will pay NI company rate for the full 40 hours wether the employee worked those hours or not . the employee will then also get full contract

      I;ve got some more radical ideas as well 😉

      Forbin

      • Something even simpler might work (going back to the eighties)
        1. As you say, repeal Glass Steagall;
        2. Outlaw limited liability companies for traders;
        3. Make anyone who trades an onshore equity partner – they would soon cut risk down!

  3. Fascinating article, Shaun. A few comments:
    1. Unless you rig the stock market (as in Japan) as well as the bond/lending market, the share prices tell you much more than central bankers/politicians will ever do;
    2. When a bank’s market capitalisation goes below book value, you are in deep trouble;
    3. When a funding ratio goes above 100% of your existing market capitalisation (let alone a 9:1 ratio), you are in even deeper trouble.
    as an ex-investment banker (boos all round), I would offer the following answer to your question and to Chris SW above:
    1. Lending money, as opposed to trading derivatives, is very boring;
    2. Investment bankers and clearing bankers have absolutely nothing in common;
    3. Investment bankers are much more vocal and articulate than clearing bankers;
    5. Investment bankers get huge bonuses (still).
    Net result:
    1. Bust banks because of crazy risk-taking;
    2. A dearth of real lending;
    3. Huge bonuses are paid;
    4. Years after the risk-taker has had the bonus, the bank gets fined billions for mis-selling/fixing LIBOR/Forex etc etc
    The purpose of a bank has become to fill the pockets of the investment bankers. This will only change when banks are forced to split up trading from lending (ie never) or when the whole system crashes (probably sooner than never).
    Rant over.

  4. I very much enjoyed your interview on Tip TV about the Bank of Japan, Shaun. You said near the beginning that policy had got the Japanese economy into such a parlous state that it was really hard to decide what the BoJ should do now. This reminded me of the interview with Australian economics professor Steve Keen on Boom Bust:
    https://www.rt.com/shows/boom-bust/360094-india-unemployment-china-debt/
    (it starts at about the 3 :50 mark on the tape.) The lovely Ameera David asks Keen what the BoJ’s next move should be. He goes into a tirade against central bankers in general but never answers her question. I suppose that he can’t see any good option either.

    • Hi Andrew and thank you

      As to the question of what to do about Japan whilst I did not know that Zak would ask that it had been on my mind. The day before I had been discussing it with a friend ( exciting lives I know…) and I said that it was now such a mess that it almost felt like all roads were wrong! Thanks for the link which I will look at later as for some reason the flash player on my browser (internet opera) has gone on the blink.

  5. To return to the question which headlines today’s blog, it really is amazing, isn’t it?
    Hundreds and hundreds of billions of £/$/€ thrown at them, all govt. economic policy since the crash geared to making the banks more profitable, allowing them, against the criminal law, to continue trading, when, even now they are insolvent; it beggars belief that either, people could actually be so horrendously greedy that they bankrupt the whole World, and that when it is shown that they have, there is no punishment for them, even when shown, time and again, that laws were ignored, or that politicians with their grubby, piggy, grasping fingers, and their absolute lack of ethics or morality, should be in position, and have the lack of shame, to protect them and take sinecures from them, indecently quickly after their political career wanes.
    Life imprisonment with hard labour for all of them.

    I also recommend strict liability for all wrongdoing at board level.

  6. I have always been taught that one had to get the balance sheet right in terms of value. Essentially the UK banks and political class have not had the courage to do that with the Banks – and to do it now just shows how much has been wasted and leaves the political class with so much egg on their faces- complete lack of understanding of finance but then its other peoples money. I don’t think they will get away with it again – TBTF bring it on – its the only way to keep the others honest.

  7. Bankers have financed the housing bubble if they had not lent multiples of income levels to people then there would have been no housing bubble,no debt slavery and the vast reduction in disposable income available for other goods and services would not have occurred.
    The incredible part is that they lent money that they created out of thin air and still managed to make an unsustainable business model,that takes stupidity and recklessness to unprecedented new levels.
    This cannot go on much longer and there could be a domino effect if one these big banks goes down ,
    Yet what’s on the news The Bake Off…. Brad Pitt….Brexit…… Putin. The two finest citizens the US have got to offer Trump or Clinton???
    What most people don’t realise is that their pensions and savings that most think are guaranteed, are at serious risk from criminally irresponsible bankers Central Bankers and the propaganda of politicians.
    Exponentially expanding currency/debt is unsustainable

    • Hi PrivateFraser

      I often refer to the Dune series of novels and when he was in trouble Baron Harkkonen declared a fete or festival. In other words to distract the masses whose life was very unpleasant under Harkkonen rule.

      As to the news I agree that it has been dumbed down. I had BBC 5Live on earlier and the first item on the news was that another presenter ( Mary Berry) had left the Great British Bake Off. Now I know a lot of people like that program but…

      • And there were 1500 viewer comments about the bake off cast.
        This is important stuff, whereas the fact that all the banks are bust is a technical detail

        • Maybe the banks secretly fund the junk that the BBC now produce for the masses, conspiracy theories are go!

  8. The most banks are bust and have been for years. It is only governments throwing our money at them that makes them appear financially sound and able to carry on trading. Any other industry would have been bankrupt and liquidated by now. It was a missed opportunity not to split them up in 2008, but it should still be done now and let the investment arm look after itself. Would that be worse than the whole system collapsing any time soon?

  9. It would appear that most of the comments, which seem to be based on fact, would be criminal offences in France, especially if they mentioned Crédit Agricole. The notion that discussion of serious threats to every citizen in the EU can be swept under the carpet seems to be the norm for our ‘controllers’.

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