The problems of the banks have not gone away

As we progress through 2017 we will reach the decade point for the credit crunch era especially in UK terms if we count from the collapse of the Northern Rock building society in October 2007 when it required liquidity support from the Bank of England. We are also left mulling establishment promises like this as quoted by the BBC.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Now whilst some of it was taken over by Virgin Money giving the UK taxpayer a loss. some of it remains with UK Asset Resolution Limited.

Today, UKAR comprises of approximately 200 colleagues and is responsible for around 215,000 customers holding £33.1 billion of mortgages and loans.

Around £9 billion of that is from Northern Rock and the rest is from the failure of Bradford & Bingley which also failed. So we are left mulling the meaning of the word temporary one more time.

The next theme we kept being promised was that this time would be different and that there would be fundamental reform of the banking system. Actually that reform got kicked into the very long grass in the main and has yet to fully arrive. Back in 2011 the BBC reported it like this.

The ICB called for the changes to be implemented by the start of 2019…….The BBC’s business editor, Robert Peston, called it the most radical reform of British banks in a generation, and possibly ever.

Of course since then we have seen various delays and “improvements” to the plan as we wonder if it will ever be implemented or whether banks will collapse again first. So the reform so lauded by Robert Peston became this in February last year.

Sir John Vickers, who headed up the Independent Commission on Banking (ICB), said: “The Bank of England proposal is less strong than what the ICB recommended.”

In a BBC interview, he added: “I don’t think the ICB overdid it.”

The Bank of England rebuffed the criticism.

As ever the Bank of England moved to protect the banks rather than the wider economy.

Deutsche Bank

Today has seen yet more woe and bad news reported by Deutsche Bank which has never really shaken off the impact of the credit crunch. From Bloomberg.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

Deutsche Bank took 1.59 billion euros of litigation charges in the fourth quarter, more than the 1.28 billion euros analysts surveyed by Bloomberg News had expected on average. While 2015 and 2016 were “peak years for litigation,” this year will continue to be “burdened by resolving legacy matters,” Deutsche Bank said in slides on its website.

Ah “legacy issues” which is the new version of Shaggy’s “It wasn’t me!”. Here is a breakdown of where they stand.

Last month, Deutsche Bank finalized a settlement with the Justice Department over its handling of mortgage-backed securities before 2008. The bank agreed to pay a $3.1 billion civil penalty and provide $4.1 billion in relief to homeowners. This week, it was fined $629 million by U.K. and U.S. authorities for compliance failures that resulted in the bank helping wealthy Russians move about $10 billion out of the country.

Also we have some signals as to what may be coming over the horizon.

A criminal investigation of the trades by the Justice Department is ongoing. The bank also hasn’t resolved investigations into whether it manipulated foreign-currency rates and precious metals prices.

Apart from that everything is hunky dory. If we look at this overall there is a very odd relationship between countries and banks these days. Banks get “too big to fail” support both explicitly and implicitly but they are also fined fairly regularly and hand over cash to taxpayers. Mind you some care is need here because Deutsche Bank is backed by the German taxpayer but the fines above have gone to the US and UK treasuries.

The one case where banks have some argument for saying official policy hurts them is in the case of negative interest-rates and of course the ECB has a deposit and current account rate of -0.4%. But whilst there is an element of truth in this there are also issues. The most obvious is that the banks wanted many of the interest-rate cuts that have been made and have also benefited from the orgy like amount of QE (Quantitative Easing) bond buying. The second is that the ECB has allowed them to borrow at down to -0.4% as well in an attempt to shield them.

These are bad results from my old employer and perhaps the most troubling of all is the impression created that clients are moving business elsewhere. For a bank that is invariably the worst situation. This is how it is officially put by the chairman.

Deutsche Bank has experienced a “promising start to this year,”

The share price had been on a strong run but has dropped 5% today so far.

Unicredit

Ah the banks of Italy! They seldom get far away from the news. It has seen its rights issue plan approved today as we mull why it need so much extra capital if things are going as well as we are told? From Bloomberg.

Unicredit Spa will sell new shares for more than a third less than their current price in a 13 billion-euro ($14 billion) rights offer aimed at strengthening its capital position.

The bank will sell stock at 8.09 euros a share and offer 13 new shares for every five held….. The offer price is 38 percent less than the theoretical value of the shares excluding the rights, known as TERP.

So more woe for shareholder as we note that the recent rally from around 19 Euros to just below 27 requires the perspective that the price was 423 Euros at the pre credit crunch peak. Also this is not the only rights issue that has been required.

In 2012, amid the global financial crisis, UniCredit sold shares at a 43 percent discount to raise 7.5 billion euros.

Also the mood music became a combination of grim and bullying.The offer document suggested that even with the extra capital there was no guarantee that things would be okay and hinted that if the bank did not get its money then shareholders would be even worse off if the bank failed.

It’s Chief Economist Erik Neilson (ex Goldman Sachs) is very opinionated for someone who works for an organisation that has performed so badly.

Comment

We are continually told that this time is different and that the banks have been reformed and then yet more signs of “trouble,trouble,trouble” as Taylor Swift would put it emerge. In the UK we have seen signs of yet another cover up at HBOS this week as Thames Valley Police reports.

Following a six year Thames Valley Police investigation into a complex multi-million pound fraud involving bank employees and private business advisors, six people have been convicted at Southwark Crown Court of fraud and money-laundering offences…….The fraud resulted in these offenders profiting from hundreds of millions of pounds at the expense of businesses, a high street bank and its customers.

When the Clash wrote these lines they were not thinking of the robbers working for the banks.

my daddy was a bankrobber
but he never hurt nobody
he just loved to live that way
and he loved to steal your money

These matters provide plenty of food for though as today 2 European banks take centre stage but it is like a carousel. Monte dei Paschi is now in state ownership and no doubt there will be more bad news from RBS. On and on and on it goes.

Me on TipTV Finance

http://tiptv.co.uk/inflation-quagmire-not-yes-man-economics/

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16 thoughts on “The problems of the banks have not gone away

  1. I can understand why some banks are too big to fail due to collateral damage however the crooked bankers are not too big to put in jail. Its time to take back bonuses, inflict heavy fines or jail terms on those individuals who either behaved without scruples or were outright crooks.

    • Hi Pavlaki

      Somehow we have been sold the line that directors of banks are the banks and that their skills are irreplaceable. Of course experience has taught us exactly the opposite! However if there was any true justice many more banking directors and senior managers would be in jail.

  2. Two things struck me about the HBOS case resolution this week:

    1, The ONLY difference in this case from normal bank practice is that the employees sought to enrich themselves. We know from both GRG of RBS and banking experience down the decades, that the first person to be raped to try and protect the bank and its employees’ bonuses are their customers. By virtue of the banks’ privileged position, they are able to tilt their clients into bankruptcy at the drop of a hat. The HBOS employees were simply using the operational experience they had gained at the bank – but then made the small enhancement of pointing them towards the direction of their own linked consultancy.

    2. That during almost the entire period of many small and medium sized businesses being raped, the banks (namely RBS and HBOS) were majority owned by the Government.

    Apart from the terrible impact on lives, their appalling business practices and the lack of lending reaching small and medium sized businesses, has had a material impact on output, employment and the structure of the economy.

  3. Fines hit the shareholders who were usually just unfortunate passengers as the bankers drove the bus off the edge of the cliff not the main culprits who were the bankers themselves but for the government, they are a brilliant revenue generating exercise. Hence preference for fines over jail sentences in most countries e.g. Eric Holder in the US.

  4. Shaun, glad you reminded us. And my bank, Smile a trading name of the C-op Bank is currently beeping threatened with being wound -up due to former malpractices. Really no different to 2007 is it. Just different names on the tin.
    Paul

    • Hi Paul

      It is particularly sad due to the cooperative and supposed mutual nature. I looked this bit up on Wiki and it is hard to know whether to laugh or cry about it now.

      “In 2008, smile launched its ethical policy[7] vote, giving customers the opportunity to change the things that matter most to them. These included turning down millions of pounds of business, including accounts for known arms dealers, cosmetic businesses which test on animals, and companies which affect the environment with dangerous chemicals.”

  5. Hello Shaun,

    as HMG has done nothing in law to change anything although promising by 2018 it will all be solved – why are we surprised its not?

    well I have no doubt at all HMG will be surprised ! well they will say that ofcourse but we all know …..

    Governance of the People by the Banks for the Banks

    BoE has helped the Banks but not the people …… and MSM looks the other way……

    time for more popcorn as the next act is coming on stage

    forbin

    • Hi Forbin

      The bankocracy continues. After all in spite of confessing to another Forward Guidance fail via an upgrade to UK GDP growth Mark Carney did not wind back on any of the bank support. In fact he tried to take the credit for it! But apparently unsecured credit is not a problem although this time around he seemed less sure as to whether car loans should be secured or unsecured credit.

      Still with the UK Pound £ falling a cent against the US Dollar and Euro Mark Carney will be pleased.

  6. Great blog as usual, Shaun, and a great interview with Tip TV Finance.
    In the TV interview, Mike Ingram said that the CPIH the ONS wants to make its headline measure of inflation is like the US CPI. It is and it isn’t. They both use imputed rents to measure owner-occupied housing (OOH) costs, but otherwise are dissimilar. The US CPI is designed to be a cost-of-living index for all categories. Because it uses imputed rents to measure OOH costs, the net acquisitions weight for household appliances in the US CPI is reduced to account for rent quotes in the imputed rent series where the dwelling is rented with appliances. The US CPI contains other imputations: there is a US CPI for domestically produced farm food. The CPIH is a composite of an imputed rent series and the UK HICP, a “pure” inflation index, and not in any way a cost-of-living index. It would violate HICP principles to impute the price of services received from household appliances using imputed rents, or impute prices for consumption by farm households of food produced on their own farms. An American equivalent to the CPIH would be a composite of the US HICP for the total population and the US CPI for owners’ equivalent rent. The US BLS has never calculated such an index and never will, even if Trump’s mother was Scottish.
    The move to the CPIH can in no way be justified as a nod towards international practice. No other country in the EEA publishes a composite of their HICP and an imputed rent series. The South African CPI is probably the closest to the CPIH of any existing headline inflation indicator outside of the UK. It is an awkward compromise between a cost-of-living index and a macroprudential indicator to be used by the Reserve Bank of South Africa, with the latter use being prioritized. Without endorsing their choice, one must say that South Africa is a far poorer country than the UK, and it would be costly for it to keep two quite different consumer price series. Also, it is possible within a few years the South African CPI will take another lurch in the direction of a macroprudential indicator, with the imputed rents series being replaced by an OOH component based on net acquisitions. Then the CPIH would really be friendless, without any official series published abroad that was even approximately comparable to it.

    • Hi Andrew

      You are right to point our the differences between US CPI and UK CPIH. I did not correct Mike because he meant a similarity in the broad sweep of using rents as a proxy for owner-occupied housing. The US of course also has CPI only for urban areas….

      i did not know the full South Africa situation so thanks for the update.

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