It is always the banks isn’t it?

Modern economic life invariably revolves around the banking sector or as it has been named “The Precious” in a nod to the Lord of the Rings saga. This is because it is inextricably linked to the supply of credit and hence money via the amount of lending they do. Today I wish to look at some ch-ch-changes which have happened this week but this comes also with another notable change from earlier this month. It came from a UK portfolio manager famous for not investing in banks.

New holdings that have resulted from this strategic shift include Lloyds Banking Group. I have often heard Neil say that banks should be viewed as warrants on economic growth. In a modern ‘fiat money’ system, banks play a pivotal role in the economy through the creation of credit. ( Woodford Funds).

Meanwhile if we remain with the UK some things have remained the same as this week saw yet more retrenchment and deleveraging.

Barclays  cut its stake in Barclays Africa Group  to 15 percent sooner than expected on Thursday, ending more than 90 years as a major presence in the continent. (Reuters)

There is something familiar here though as we look at the result of a bank going international.

it will lead to an initial 1.2 billion pound loss.

There is also much going on elsewhere including some familiar names.

Monte Paschi

The saga of the world’s oldest bank has gone as follows. It found itself with ever more non- performing loans which increasingly challenged the solvency of the bank itself. This was met with a barrage of denial and political rhetoric as Italy’s Finance Minister Padoan told us that there would be no bailout and a year or so ago Matteo Renzi who was Prime Minister declared that the shares were good value. After shareholders tired of putting ever more good money after the 8 billion Euros they had put in turned bad this happened last December. From Bloomberg.

Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The European Central Bank said then it needed to secure 8.8 billion euros ($9.9 billion) to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

As we have discussed before this looks something of a hybrid as there are both bailout and bail in elements to it. We also learnt never to take financial advice from Matteo Renzi. Another issue is the way that this has gone on and on and on, after all it is now June. The media yesterday proclaimed a solution had been found but the detail was weaker.

The deal, following “intensive” talks between Italy, the EU and the ECB, still requires formal approval.

Remember the miss selling scandal?

Monte Paschi will compensate retail junior bondholders who weren’t properly informed of the risk they were taking on that bonds might be converted to equity, according to the statement. The bank will buy the converted equity from those investors and pay them in “more secure senior instruments.”

That is what depositors were told – “secure” – when the existing bonds were miss sold to them! Also why would investors want to do this?

Monte Paschi is in discussions with funds including Credito Fondiario SpA and Fortress Investment Group LLC about investing in the riskiest tranches of the securitization, which is backed by loans with a face value of as much as 30 billion euros, people said last month. Atlante II, the private investment fund set up with the help of the state to invest in non-performing loans, is expected to buy the largest portion of the same tranches, they said.

Let us remind ourselves that in a bailout the taxpayer usually takes the riskiest debt, otherwise why is a bailout necessary? If I was an Italian taxpayer I would want to know what was going on here and also why I was backing a private fund like Atlante II?

The Veneto Banks

This saga seems to be something of a never-ending story.

the future of the Veneto banks is still uncertain. The 6.4 billion-euro precautionary recapitalization requested for the two small lenders were thrown into doubt last week after the commission rejected a request by the banks to reduce the 1 billion euros of private capital they’re required to raise, according to people with knowledge of the matter. ( Bloomberg).

Still I spotted this earlier and there are translation risks but Finance Minister Padoan does of course have a track record.

the problem of banks was exaggerated

Yet some seem to disagree with this. From Reuters.

“The effects of not solving the crisis at the two banks would not be smaller than those created by a default by Greece,” CEO Fabrizio Viola said in an interview with daily Corriere della Sera………Viola added that the effects should not be underestimated given that the two lenders have extended loans worth 30 billion euros, mainly in the industrial north eastern regions of the country, and “calling them back would create tremendous chaos”.

Usually we find people telling us that they are not Greece!

Banco Popular

This is a different type of situation as the Spanish economy has been doing well in recent times but Banco Popular has been unable to benefit enough from this to offset past troubles. From the Financial Times.

Popular, which earlier this month disclosed a €137m loss for the first quarter, linked to higher provisions on its real estate portfolio.

As ever pouring in more equity via rights issues has been unable to match the scale of the downturn.

Mr Lowe ( an analyst at Berenberg ) estimates the bank, which has a market capitalisation of €2.6bn and raised €2.5bn from shareholders in a rights issue last year, needs to raise €3bn-€5bn in additional capital, on top of asset sales. “If you were to raise €3bn, the market may still question the capital situation,” he said, adding that even in that case, the share count would more than quadruple, creating “huge dilution” for shareholders.

As we see shareholders being blitzed let me raise an issue which gets swept under the carpet. The official prospectus for a rights issue is supposed to be a true and fair record of the situation yet banks keep doing them and then heading south at full speed ahead. But no-one seems to go to jail for what must be misrepresentations. This is an international issue as for me the Royal Bank of Scotland rights issue of 2008 seems an example of this which could not be much clearer.

Bond Vigilantes have provided us with another example of the woes of Banco Popular.


This September marks the end of a type of lost decade for UK banks as it will be the anniversary of Northern Rock having to go cap in hand to the Bank of England. Who thought we would still be reviewing something of a mess this far down the road back then? However have one or two like Lloyds Bank finally seen the beginnings of a new hope? If so it will be because the UK did at least face up to some of the problems at the time. Sadly not all of them or we would be in a better economic place now.

However if we look at Italy we see an example of country that has used this lost decade to mostly stick its head in the sand and deny everything. So presumably it will take it much longer to even have a hope of a turn for the better.



14 thoughts on “It is always the banks isn’t it?

  1. The EU and especially the EZ are attempting the impossible in trying to bail out its’ banking sector without state aid. America acted via the Fed to stabalise its’ banks you got the money, needed or not, and the recipients were mortified. I genuinely think the Fed thought that sufficient punishment. The UK acted in a similar manner but without the compulsion. As a result I believe the EZ banking system is insolvent.

    I know this is a shoulda, woulda, coulda but the banks should have been nationalised, all the problems fixed then back fully repaired to the private sector, hopefully older and wiser. The wrong doers should have been punished, not with prison but community service. It would have been a pity to waste such fine minds.

    I find it sickening that 10 years later we’re taking £30 a week off the disabled to pay for a mess they never created.

    • Fine minds!!! It was these “fine minds” that “skilfully” steered their banks into insolvency. There’s nothing “fine” about them.

      Personally, had I been in charge when they threatened to leave if they didn’t get their bonuses “for failure” I would have held them to it and shipped them out to any country that would have them and if they were UK national s made then stateless whilst if foreigners I would have imposed an entry ban for life and revoked their visa/residence permit as an absolute minimum.

      • BoE wonk :

        Bloody ‘ell! That’s what I call thinking!
        Here Carney, why do we never think of things like that?

        Dunno. Think our minds must be too highly trained ……


        ( HHGG )

        • These “Fine minds as you call them would never have trodden the path they did unless they had no moral compass. Moreover, such “Fine minds” should not require close supervision as these clearly proved they did.
          Through their behaviour they have proven themselves to be psychopaths, you should never place a psychopath in a position of responsibility as they will always act solely in their own interests.

  2. supply of credit ? no these days its the supply of debt that cannot be repaid !

    in any other business if you went bust you’d be liquidated and another competitor would then take over . The top wonks would also be bust too .

    Obviously this only took place in Iceland.

    Gordo the Dumb took over the TBTF banks , took on their debt and …..

    well , nothing else changed , so here we are almost 10 years later with the same problem – Banks being insolvent , except now its Governments and their tax payers too .

    Nobody in MSM or HMG are learning anything – let the Banks go …… if for their own good and ours ….


    • Hi Forbin

      I used supply of credit because whilst we have broad measures of the money supply I think that they are mostly measures of money demand. But anyway I agree with you that things would have been set on a different path if we had not been so anxious to not let any banks fail. Also some bank directors should have been in court.

  3. Shaun, A very timely article for me since I am holidaying the next 10 days in Northern Italy. Ive a mind to visit MPS in Siena, close to one of my destinations – Firenze. I’m driving down there in my red italian sports car and surfing around the Cinque Terra.
    I plan to take my own Euros, very expensive ones purchased in the UK in February , this is just in case theres and Italian bank run and I cant get any out of holes in the wall.
    Ill report what I find in country about the economy and banks!

    Paul C.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.