It is always about the banks or in central banker speak “The Precious”

If we look back over the credit crunch era we were told that bailing out the banks would lead us into a better future. The truth nearly a decade later in some cases ( Northern Rock in the UK) is that we see a situation where central banks have enormous balance sheets and low interest-rates dominate with the Euro area and Japan in particular having negative interest-rates. That is most odd in the Euro area as of course we have been told only this morning by the Purchasing Managers indices that growth in France and Germany is strong. So something has changed and is not quite right and if we look we see signs of trouble in the banking industry even after all the bailouts and accommodative monetary policy.

Royal Bank of Scotland

This has turned out to be the doppelgänger of the concept of the gift which keeps on giving. Each year we have had promises of recovery at RBS from whoever is in charge and each year that fades to then be replaced by the same in a so far endless cycle.  Rather like Greece actually. Also the original promise of the UK taxpayer getting their money back seems further away than ever as the price of £2.40 is less than half of what was paid back then. Quite an achievement when we see so many stock markets close to all time highs.

As to the economic effect well claims of benefits have had to face a stream of bad news of which there was more yesterday. From the BBC.

Hundreds of jobs will be lost following a decision to close almost 160 RBS and NatWest branches.

RBS blamed a “dramatic shift” in banking, with branch transactions falling 43% since 2010.

In the same period, online and mobile transactions have increased by more than 400%.

Whilst online and mobile transactions have plainly surged it is also true that all bad news is claimed as somebody else’s fault. If you have a zombie bank wallowing on then you will of course be affected by change especially in this sort of timeframe.

RBS remains still majority-owned by taxpayers following its multi-billion government bailout almost a decade ago.

If we look back to the UK motor industry bailouts were stopped because the business model no longer applied yet that critique seems to have been forgotten. I note that after of course a fair bit of economic pain the motor industry is producing record figures.

Co-op Bank

I wrote about the latest problems of this bank on the 13th of February and this morning I note we have a sort of official denial of trouble in the Financial Times.

Co-Operative Bank says “a number” of suitors have come forward since it announced plans to fin a buyer in February.

This gives rather a different picture to this from Sky News on Tuesday.

Co-op Bank bonds have been trading at little more than 80p in the pound this week, underlining investors’ pessimism that a £400m repayment due in September will be made.

Talk is cheap but apparently those bonds are not cheap enough?! Easy money if you believe the hype especially at a time of low interest-rates and yields.

But you see I warned about this back in February.

The problem in my opinion is that when a bank has trouble the record is simply that so far we have never been told the full truth at the beginning.

And note this from Sky News.

One insider said the Bank of England had hosted a meeting last week at which the Co-op Bank’s problematic pension schemes had been discussed.

The losses of £477 million last year and the announced need for £750 million should there not be a sale are hardly good portents. Back in February I feared the Bank of England might find itself stepping in and that danger has increased in the meantime.

Portugal

My eyes were drawn to this yesterday from Patricia Kowsman of the Wall Street Journal.

Portugal state-owned bank raises EUR500M carrying hefty 10.75% interest. Says 49% of buyers asset managers, 41% hedge funds. Majority in UK.

In these times an interest-rate of 10.75% is extraordinary for a state-owned bank and compares to a ten-year bond yield for Portugal that has been around 4% for a while. Why might this be so?

Also on Wednesday, a group of major international investors that suffered losses on Novo Banco’s senior bonds issued a warning to the Portuguese authorities and indicated that an agreement to minimize those losses would be beneficial to the country. The group, led by BlackRock and PIMCO, said Portugal and Portuguese banks continue to pay the Bank of Portugal’s decision to transfer obligations from the New Bank to BES ‘bad’ at the end of 2015.( Economia)

So a past bailout has caused what Taylor Swift would call “trouble,trouble, trouble” and if we return to Patricia the record of Caixa Geral de Depósitos has been very poor.

Well, it’s a state-owned bank that had a EUR1.86B loss last year, big NPLs, in a country with a v weak banking system ( NPLs are Non Performing Loans)

We find ourselves in a situation where a past bailout ( BES) have made life more difficult for a current one and the Portuguese taxpayer ends up being held over a barrel especially after the European Commission declared this.

CGD will also take actions to further strengthen its capital position from private sources

This bit raised a wry smile.

the Commission analysed the injection of €2.5 billion of new equity into CGD by Portugal and found that it generates a sufficient return that a private investor would have accepted as well.

Can they see the future now? Shall we call it forward guidance…..

Italy

Speaking of forward guidance around this time last year Finance Minister Padoan was telling us that bailouts were not going to be required for Italy’s banks and Prime Minister Renzi was telling us what a good investment the shares of Monte Paschi were. Anyway if we move to this Wednesday Reuters were reporting this.

Italy’s plans to bail out two regional banks pose a tough dilemma to European regulators, who are still considering whether Monte dei Paschi qualifies for state aid, three months after giving a preliminary green light.

Banca Popolare di Vicenza and Veneto Banca said

If they hang on long enough with Monte dei Paschi maybe something will turn up. Oh and there is Unicredit the largest bank which I called a zombie on Sky News about five years ago. It is issuing another 13 billion Euros of shares which further dilutes shareholders who of course have had to dig deep into their pockets before. Also there were plenty of rumours that it was a big recipient from the ECB TLTRO ( cheap money for banks) this week. Looking more generally Frederik Ducrozet of  Bank Pictet thought this.

Extrapolating from the share of each country in previous operations, Italy and Spain would account for at least 60% of total TLTROs holdings.

Greece

The official mantra has been along the lines of D-Ream’s “Things can only get better” and yet this happened this week. From the Bank of Greece.

On 22 March 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €46.6 billion, up to and including Wednesday, 5 April 2017, following a request by the Bank of Greece.

The increase of €0.4 billion in the ceiling reflects developments in the liquidity situation of Greek banks, taking into account private sector deposits flows.

In a situation where we keep being told the Greek economy is improving?

Comment

This is like an economic version of the never-ending story. Proclamations of success and triumph are followed by “move along please, nothing to see here” and then well you know! In addition to the bailouts there are other schemes to help the banks. For example the cheap loans offered by the Bank of England under its Term Funding Scheme have now reached some £47.25 billion. If we move to Europe I note that Bank Pictet think this.

In aggregate, the maximum subsidy from those long-term loans at a negative rate is EUR3bn on an annual basis, compared with a total cost of the ECB’s negative deposit rate of around EUR5.5bn (a number that will grow to over EUR8bn as QE continues).

As you can see some of it is hidden or to be more precise not generally known. The biggest critique is simply the “lost decade” for the banking sector we seem trapped in and we learnt explicitly from the chief economist of the Bank of England earlier this week that different rules apply to his “Precious”. From Chris Giles of the Financial Times.

why does the chief econ of BoE think banks accounting for a third of the productivity puzzle is peanuts?

When people look away though banks seem to return to type.

Credit Suisse Group AG increased its bonus pool 6 percent…….The bank is increasing its bonus pool for the first time since 2013 in spite of a second consecutive annual loss.

 

Reuters

After posting this I note that a long post from Reuters has a different perspective to mine.

Banks used to have a cosy relationship with Britain’s government. Now they say they are struggling to be heard as the country prepares to leave the EU…….

 

Or perhaps not albeit from a different corner.

Senior bankers expected special treatment from the government after Britain voted to leave the EU. They expected ministers to champion their cause, above other industries,

 

 

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33 thoughts on “It is always about the banks or in central banker speak “The Precious”

    • Hi Forbin

      There are past and existing responsibilities to EIB projects we are shareholders in and investments by it here, they should stand. When we leave that stops and frankly as the EIB acts as something for the Euro via the Juncker Plan we should have reduced our position in principle in the same way as the ECB but by less. That’s why in my opinion Jean Claude is on the stomp right now…..

  1. Another example this morning, ‘BOJ’s Kuroda sees no reason to withdraw stimulus as BOJ balance sheet reaches 90% of GDP’. King of the crazy gang

  2. Hi Shaun, That return is staggering for a SoE. That 10.75% is possible for a bank own by the state. I can only imagine in the capital raising that they stand to lose all their investment should there be subsequent losses… Is this the return of true market interest rates?
    Maybe I misunderstand what the return is for, were it a dodgy private bank them maybe these rates would be understandable. I must be missing something…
    Paul

    • Hi Paul

      Looking at it the bail in system accompanied by the ongoing troubles of the bank mean that for a bondholder a dodgy public bank is rather similar to a dodgy private one. Unintended consequences and all that……

  3. I am just delighted that Credit Suisse is increasing its bonus pool. You can’t just stop paying bonuses for the trivial reason that the bank is making losses, can you?
    After all, if it doesn’t do so, the “talent will walk” and then where would we be?
    Has there ever been an industry (I don’t count football) where such ludicrous rewards have been doled out for such pointless jobs?

      • Forbin,
        You have gone too far. These are the pillars of society, the rock on which our democracy is founded, the very essence of our freedoms (etc etc etc).
        Oh, and just remember that some of them have to keep paying for the taxi while they are signing in and out.

  4. It was obvious to everyone back in 2008 that when they said “us” they meant themselves. A comment up there with call me Dave’s we’re all in it together line. Meaning you’re all in it to fund the banks failed lending which we’re going to continue as its great for the few.

    2008 ish when the illusion that Britain is an honest country was blown apart, they stopped caring about hiding their corruption the day QE was invented to continue the party in Westminster and the City of London … and still it goes on.

    • The real stroke of genius, IMHO, was calling it QE. I am old enough to remember when it was called printing money and everyone immediately thought of Weimar Germany or Zimbabwe and recoiled.
      The word “quantitative” sounds mathematical and technical, while “easing” sounds reassuring . The combination is therefore both sophisticated and human.
      Given that almost no-one in the mainstream media even points out that it has essentially destroyed returns on savings, has created an asset boom, lets politicians spend far more than they tax without suffering the consequences in borrowing costs, I would say that the choice of name QE is nothing short of genius.

      • at one time you could have counted on some in MSM to point this out

        sadly these days if they did they would be accused of “fake” news or worst “terrorists”

        I suspect Shaun would be accused of peddling “fake ” news by the establishment too

        Forbin

        • This most certainly is a “fake news” site, anything that doesn’t adhere to the BBC/CNN/broadsheet line is the essence of fake news. Christ those so called business journalists at the BBC are from the Double Plus Good School of Business where everything is wonderful!

          Could you imagine what would happen to the country if the aforementioned media outlets starting churning this kind of websites material as its new line.

          People would say i know thats the truth … thats what would happen!

    • This is in reply to your 25 March tirade which, if that’s how you want to play then so be it:

      I am not a landlord nor have I “done well” out of QE or ZIRP as my house has been paid off and quite how I could “do well” out of QE when all other houses go up by the same amount is beyond me as I can’t exactly trade up although I have been ripped off by ZIRP as I am a saver and have been crucified since 2008. As you can see you couldn’t be more wrong in your assumptions about me.

      Please explain to me how a saver has “financially raped” anyone in a ZIRP environment? I can certainly explain how a saver is raped by borrowers in a ZIRP environment – savers get interest below inflation in order to subsidise cheap loans to borrowers.

      41 eh – looks like I too was wrong as you appear to generation X just like me! – https://en.wikipedia.org/wiki/Generation_X.

      Are you aware that there are many ways in which the property market is rigged? That to stop ZIRP (which I would welcome), QE HTB1, HTB2, FLS et al (which I couldn’t care o stop ZIRP (which I would welcome), QE HTB1, HTB2, FLS et al (which I couldn’t care less about being ended )that prices would remain elevated by developers who have immense land banks which they only release for development as prices go up but sit on if the market goes soft? How about that for extremism! If you got rid of all Govt interference you would still be left with Private industry rigging, it’s endemic.

      As to “Was waiting for your insults, so predictable.” I would remind you of this :- “You speak like a boomer bought when prices were cheap and is doing ok out of the bubble, ZIRP and QE, who is clueless about what its like renting in the UK. So no i won’t stop hankering to wanting a society where people can afford to buy houses to raise their family in with their wages.” – https://notayesmanseconomics.wordpress.com/2017/03/16/the-bank-of-england-may-consider-yet-more-easing-going-forwards/#comments.

      All in response to a non personal insult post. Tell me Arthur, can you not see the similarities between your post on 16 March and mine on the 25th? If you don’t like my post then you don’t like yourself as it is mirror image of your earlier post in terms of insults the one difference being mine was a response to your initiative and yes your reply was certainly predictable.

  5. Banks have proper functions: a payments system – arguably a public utility; making loans; helping folk to manage wealth.

    The problem is that they’ve attached a casino to this structure and it is that that has caused all the problems. They have also developed other activities such as high frequency trading which, in my view, is little different from the Mafia skimming a casino; pure, and quite indefensible rent seeking, effectively a tax on the legitimate investor.

    Also if you look at the derivatives market it is many times larger than that which would be justified economically; it has just become a vehicle for the banks to rip each other and joe public off; completely indefensible.

    Also to criticize some banks for paying bonuses when the bank is losing money is, in my view, to miss the point; after all you could work for a section of the bank that has done very well and deserve a bonus when the bank as a whole has not done well; this is to tar the individual with the whole. The point in my view is not that they are getting paid bonuses but that the bank is in the sort of activities in which bonus might be deemed appropriate; that is risky prop trading.

    Mervyn King was right; if a bank is too big to fail it is too big and until the issue of structure is properly tackled things are not going to change and the banks are indeed too big to fail and that is a failure of the political system not the economic one.

    • glass steagall act 1933 needs to be re-enacted but it won’t

      by 2018 we’re told the Banks would have been “fixed” , the only “fixing ” I’ve seen is the big jobs for ex MPs and the bonus schemes for the top few .

      Moral Hazard doesn’t exist anymore – well not for the big boys. ( sighs)

      MSM take? nothing to see here , move along …..

      Forbin

      • I see this is on the cards from Reuters

        From 2019 banks in Britain must turn their retail arms into legally separate units with their own capital buffers. The aim is to shield customers and avoid taxpayer bailouts if a bank’s riskier investment operations go bust.”

        I wonder if it will be enough

        Forbin

        • If I were the Chancellor I would charge banks for their implicit Government support. I’d set a Basel II threshold of, say, 25% and charge a percentage on the difference between the threshold and bank’s capital, multiplied by the value of the bank’s loan book. This would raise tax, penalise poorly-capitalised lenders and give cover to the bank directors to retain profits and build capital buffers.

          But I must have missed something obvious or the Government would have adopted this already!

    • The reason why the bonuses are indefensible (and I used to be a banker) is that the casino is only possible by using the balance sheet of the bank. Underwiriting earbs 6-7% in the USA because it is a cartel. There is no real underwriting as all deals are presold now.
      The fact is that they are only paid these amounts because they make a profit which is only possible because of the bank balance sheet and/or the effect of a cartel. They are getting the rewards akin to those made by successful entrepreneurs while taking none of the risk.
      That is why the bonuses are a scandal and a ludicrous tax on the rest of us.

  6. The bankers need to explain why they need large sums of money, and why Britain should cut education, health, policing and welfare in order to fund their bonuses. Whatever reasons they give, Iceland is a counterexample of the world not ending when banks were refused public money.

    In the scientific world, 1 counter-example is considered adequate proof when refuting a theory.

    • Hi ExpatInBG

      Thank you for allowing me to use one of my favourite quotes.

      Sir Karl Popper: Falsification is the criterion of demarcation between science and non-science.

      Or as you say Iceland is the reposte to Too Big To Fail.

  7. Either it was a very deep well or Alice was falling very slowly, for she had plenty of time to look about her and wonder what was going to happen next ….

    A touch of forward guidance from Lewis Carroll.

    • Hi Eric

      I like it! The best literature fits reality time and time again doesn’t it? I doff my cap to Lewis one more time and respond in kind.

      ““My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

  8. We have a largely financially illiterate population people have accepted the only way is debt to paraphrase the Yazalde song.
    They have also given upon protest due to the fascist tactic of kettle gang by police.
    People in the 1960’s and 1970’s would never have tolerated the situation that we now find ourselves in.
    We are being robbed from cradle to grave by the financial elite we live in a so called democracy yet people appear ambivalent to the loss of pensions,low wages,gig economy a report on news the other day said 12% of women over 70 are still working this is disgraceful.
    These banks are parasites who have bled the economy dry yet most of the population are clueless.

    • To be fair when the young did riot in 2011 in relation to the drug dealer from Tottenham the prison sentences they got were excessive to say the least.

      Remember one guy in Southampton getting 5 years just for putting something on Facebook that’d be a good idea to start a riot there.

      To me this was the end of the Great British riot.

      Also when the students kicked off about tuition fees pretty much every media outlet went against them .. all blogs were full of boomers wanting them strung up for wanting a little bit of what their parents had.

      • Propaganda probably enhanced by state agent provocateurs to discredit protest,the financial and political subjugation of the masses on behalf of the Banksters and their acolytes.
        We need a glass steagal act and the financial industry to be made subservient to manufacturing and production.
        There are only two ways to create real wealth manufacture or crops.
        We need proper education and proper democracy .

      • You sound like a jealous generation Y unaware of all the privileges you enjoy that boomers did not and NO! I’m not a boomer! Nor do I believe that student grants should have ever been abolished.

        • Im 41 pick a letter for which generation i am.

          You come across like a landlord who has done rather well out of QE and ZIRP and has made a decent sum of unearned gains in the rigged system, someone who needs the status quo to survive.

          If being jealous is wanting some form of free market where the BoE and Govt don’t pick winners in the extreme ways of the last 10 years then so be it. And if wanting the young people of Britain financially raped by your kind then i am very jealous.

          Was waiting for your insults, so predictable.

      • I am not a landlord nor have I “done well” out of QE or ZIRP as my house has been paid off and quite how I could “do well” out of QE when all other houses go up by the same amount is beyond me as I can’t exactly trade up although I have been ripped off by ZIRP as I am a saver and have been crucified since 2008. As you can see you couldn’t be more wrong in your assumptions about me

        Please explain to me how a saver has “financially raped” anyone in a ZIRP environment? I can certainly explain how a saver is raped by borrowers in a ZIRP environment – savers get interest below inflation in order to subsidise cheap loans to borrowers.

        41 eh – looks like I too was wrong as you appear to generation X just like me! – https://en.wikipedia.org/wiki/Generation_X.

        Are you aware that there are many ways in which the property market is rigged? That to stop ZIRP (which I would welcome), QE HTB1, HTB2, FLS et al (which I couldn’t care less about being ended )that prices would remain elevated by developers who have immense land banks which they only release for development as prices go up but sit on if the market goes soft? How about that for extremism! If you got rid of all Govt interference you would still be left with Private industry rigging, it’s endemic.

        As to “Was waiting for your insults, so predictable.” I would remind you of this :- “You speak like a boomer bought when prices were cheap and is doing ok out of the bubble, ZIRP and QE, who is clueless about what its like renting in the UK. So no i won’t stop hankering to wanting a society where people can afford to buy houses to raise their family in with their wages.” – https://notayesmanseconomics.wordpress.com/2017/03/16/the-bank-of-england-may-consider-yet-more-easing-going-forwards/#comments.

        All in response to a non personal insult post. Tell me Arthur, can you not see the similarities between your post on 17 March and mine on the 25th? If you don’t like my post then you don’t like yourself as it is mirror image of your earlier post in terms of insults the one difference being mine was a response to your initiative and yes your reply was certainly predictable.

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