The banks continue to be trouble,trouble,trouble

The weekend just past has been full of banking news which has not been good. That is quite an anti achievement when we note that a decade or so ago when the banking crisis hit we were assured by politicians and central bankers that it would never be allowed to happen again and they would fix the problems. Whereas the reality has been represented by this from the Guardian this morning.

Under the new Lloyds Bank “Lend A Hand” deal, a first-time buyer will be able to borrow up to £500,000 for a new home, without putting down a penny of deposit.

Why is this necessary? It is because the establishment have played the same old song of higher house prices and telling people they are better off via wealth effects. Meanwhile the claims of no inflation are contradicted by the increasing inability of first-time buyers to afford housing even with ultra-low mortgage rates to help.

In this instance the mortgage is 100% of the loan for the people taking it out but payments are backed for 3 years by a family member or members.

The Lloyds deal requires that a member of the family – such as parent, grandparent or close relative – helps out. The bank will only grant the 100% mortgage if the family member puts a sum equal to 10% of the value of the property into a Lloyds savings account.

I have looked it up and their liability is limited to the first 3 years.

At the end of the 3 years, you will be able to take out your savings plus interest. That’s as long as the buyer hasn’t missed any payments or their home hasn’t been repossessed.

Frankly if payments are in danger of being missed it may suit the family member to fund them. But unless things go dreadfully wrong after 3 years we have what it a mortgage with only a little equity as not much is repaid in the first 3 years.

But as ever we see something of a round-tripping cycle between the central bank which pushes cheap liquidity to the banks who then pump up the housing market.

Vim Maru, group director of Lloyds Banking Group, which also controls Halifax, said: “We are committed to lending £30bn to first-time buyers by 2020 as part of our pledge to help people and communities across Britain prosper – and ‘Lend a Hand’ is one of the ways we will do this.

Mark Carney’s morning espresso will be tasting especially good today.

China

Let me hand you over to the People’s Bank of China which has issued a Q&A about its new (easing) policy and it starts with something very familiar.

Banks need to have adequate capital to guarantee sustainable financial support for the real economy.

When central banks state that what they in fact mean is the housing sector. For example the Bank of England claimed its Funding for Lending Scheme was for smaller businesses when in fact lending to them fell but mortgage lending picked up as mortgage rates plunged. So let us dig deeper.

The Central Bank Bills Swap (CBS) allows financial institutions holding banks’ perpetual bonds to have more collateral of high quality, improves market liquidity of such bonds, and increases market desire to buy them, thereby encouraging banks to replenish capital via perpetual bond issuance and creating favourable conditions for stepping up financial support for the real economy.

As we do so we see that what are finite organisations (banks) have debt forever which is troubling for starters. We also note that this is a type of debt for equity operation as we mull that there are some quite good reasons for not being keen on bank equity. So debt in this form ( perpetual) qualifies as capital and I believe Tier 1 capital in this case. The next move is that the perpetual bonds can be swapped for central bank bills meaning that the central bank now has the risk and the investor has none in return for a haircut depending on how much collateral is required. Thus we get.

increases market desire to buy them

because if you have worries you just accept the haircut and pass the rest of the risk to the PBOC.  As to improving market liquidity then the Bank of China was quick to back up that point.

Bank of China issued 40 billion yuan perpetual on Friday at a coupon rate of 4.5%, the first bank issuer of perpetualbond in . ( Yuan Talks)

The catch is that these sort of moves create liquidity for a time but later can drain it. That is because if things go wrong you end up with two very different markets which is the real one and the central bank supported one.

So the banks will get more capital and they will use it to raise lending and if history is any guide the “real economy” will be the housing market. This will then be presented as a surprise and we will learn what the Chinese word for counterfactual is.

Deutsche Bank

It is always there isn’t it? Let us start with what looked like some better news which was a 4% rally in the share price to 8.13 Euros on Friday. This looks like an early wire on this from @DeltaOne yesterday.

DEUTSCHE BANK GETS ADDITIONAL INVESTMENT FROM QATAR…….DISCUSSIONS ON QATAR INVESTMENT ARE ADVANCED BUT NO FINAL AGREEMENT TIMING AND SIZE OF INVESTMENT UNCLEAR

As they are already shareholders then this would be a case of doubling up or rather if we look at the price history doubling down. Of course this is not the only plan doing the rounds about DB.

Shareholders in Deutsche Bank have voiced deep concerns about the German lender’s mooted tie-up with domestic rival Commerzbank, saying the move would “paralyse” the country’s largest lender and destroy value for investors. ( Financial News)

Mind you it has been doing a pretty good job of destroying shareholder value all on its own.

Greece

Here we have seen massive sums used to pump up the banks at the cost of the national debt of Greece itself. But according to the IMF at the end of last week more is needed.

Restoring growth-enhancing bank lending will require swift, comprehensive, and well-coordinated actions to help repair balance sheets. Coordinated steps by key stakeholders are needed to support banks’ efforts to achieve a faster reduction of non-performing loans (NPL).

So all the bailouts have been to the tune of “Tantalize Me” by Jimmy the Hoover from back in the day.

Comment

The sad part of all of this is that we are observing yet another lost decade. As so often the hype and indeed hyperbole has not been matched by action. Central banks like to trumpet the improvement in bank capital ratios but if you look at bank share prices then there has been a shortage of investors willing to put their money where the central banks open mouth operations are.

In the case of Deutsche Bank as well as the Chinese and Greek banking systems we see that we are entering yet another phase of the crisis. With the problems recently at Metro Bank in the UK that had its risk model wrong in another “mistake” then the central banks will be on the case this time or maybe not.

This means we have not been processing most model change requests from internal model banks. ( Reserve Bank of New Zealand)

 

22 thoughts on “The banks continue to be trouble,trouble,trouble

  1. Hello Shaun,

    “it would never be allowed to happen again and they would fix the problems.”

    indeed it appears “masterly inaction” has come home to roost !

    come on , if any other industry did nothing and assumed all would be ok , MSM would be screaming from the hill tops

    not this lot

    Glass-Steagal needs to be re-enacted now!

    Forbin

    • Hi Forbin

      Sometimes life is like a re-enaction of a Yes Prime Minister episode and I can only give the writers full credit for describing what has taken place. I can remember that the Bank of England got the Vickers Report watered down but cannot remember exactly how.

      Sir Humphrey : So the ideal is a firm which is honest and clever.

      Sir Desmond Glazebrook : Yes. Let me know if you ever come across one, won’t you.

    • Nah, who needs regulation when we have a kind and caring bank such as Lloyds/Halifax looking to “help” first time buyers with £30bln over the next year or so.

      It is entirely possible that house prices will be lower in 3 years than what they are today … this is guaranteed if there is a spike in interest rates, so negative equity will be the result just so todays bwankers can create a new utterly ridiculous product to get a commission from.

      What the hell have the regulators been doing for the last 11 years for this absurdity to still be allowed.

      • The catch is a family member or friend has to deposit at least 10% of the property value into a savings account which they cannot access for three years (or never if the mortgage payments are missed or the loan defaulted on).

        They must think people are really stupid, they are basically saying prices will fall but hey who cares, they have the cash to cover the shortfall anyway.

        • Its blatantly going to cause tension and rifts between families and friends when a payment doesn’t get made for a multitude of reasons.

          This nation and the people who run it for themselves are beyond sick.

          Carney is almost right when saying bankers shouldn’t be jailed … in that they should be put up against a wall for treason.

      • That’s just it Arthur, their plan is that interest rates NEVER go up again, so house prices can never fall, the lack of affordability however from falling real wages is another matter and will require more “creative” stimulus measures in the future, which I’m sure we’ll be discussing on here in years to come.

        • Prices were falling around 2012/13 and about to crash imho when interest rates were at this level. Then the socialist policies that are Funding for Lending and Help to Sell came into play to reinflate the bubble.

          They can crash at ZIRP levels imho, its more a case of what else they have up their sleeve to prevent this.

          Its abundantly clear that MMR needs tightening to end 35 year mortgages and put a stop to this sort of nonsense.

  2. Hi Shaun,
    As you allude to in the article,PBOChina is doing what I have previously predicted the Bank of England will eventually do with RBS,BARC and LLOY, just monetise their balance sheets and buy their bonds to boost their capital ratios when they inevitably fall to the point where even their fantasy accounting cannot hide it any more. Thus transferring the risk and the losses to the taxpayer via the backdoor of Threadneedle St.

    Of course it will be explained by the mainstream media to the sheeple in much more simple terms as a “financing operation” or “helping first time buyers” or “providing a much needed boost to the economy that will cut unemployment”.

    • Hi Kevin

      These moves which help the banks are always claimed to be temporary but have a habit of becoming permanent. Also as time passes the rules have a habit of being relaxed as we have seen with the ECB. So the central bank’s position gets riskier but as most of those who understand this are either implementing it or taking advantage of it, reality tends, as you say, not to get reported.

      We will have to see where the PBOC takes this but as we have seen so often what is the way out or exit policy?

  3. At least the banks in Italy are completely stable and luckily no other European banks have bought their bonds or we would really be facing trouble …

    • Hi James

      I thought I would leave the Italian banks out as we have covered them so often. But yes there is something of a “doom loop” in the way that the banks hold so many government bonds. Either they make a profit or the Italian taxpayer will be footing the bill.

  4. RE: Deutsche Bank “Mind you it has been doing a pretty good job of destroying shareholder value all on its own.” – Had a good belly chuckle at that!

  5. Although many banks are too big to fail the impression one gets is that it is “the market” which controls these things and governments are powerless to do anything about it. This is nonsense; we are here because of a total failure of regulation and a failure of regulation is a political failure not an economic one.

    The regulations could be changed fairly easily if there was the will but this is absent. There would be much bleating about not being able to “buck the market” but this is nonsense; we are here because politicians made it so. If banks are too big to fail because they are systemically important then this requires more regulation by virtue of that fact and not less.

    • Hi Bob J

      The market controls much less these days but it can still provide a signal or two. For example a Deutsche Bank share price down 48% on a year ago and not far from all time lows. UBI the Italian bank supposedly strong enough to merge with Bank Carige is down 44%. So there are some clues!

  6. When was the 2012 banking regulation due to come into effect?
    I seem to remember implementation being delayed until…

    • MMR if this is what you mean is in play, but to get round the affordability of repayments the banks extend the mortgage to 35 years, enabling new entrants onto the bottom rung of the ponzi scheme, at ever increasing prices.

      And also it doesn’t touch interest only mortgages for BTL.

  7. I’m afraid that £50k you deposited at Lloyds is going to be forfeit, as I can’t afford the repayment this month…unless you can help.
    Repeat every month until parents are bled white, and have no estate to divi up.
    There are people that unscrupulous, you know; I am related to some.

  8. I’m of the belief that the idea that house prices have to be supported in order to make us feel wealthy is a spurious one: tptb have unambiguously shown that they:
    1) Don’t give a fig about how wealthy SAVERS feel.
    2) Don’t give a fig about the wider economy, because for it, the liquidity of savers’ wealth is far greater than the equity from property.

    It is my belief that house price support is for one reason, and one reason only: to help banks with their Non Performing Loans ratio.
    This is necessary because performing loans mature whilst NPLs don’t (with forebearance), and to prevent the ratio from increasing, or getting them to improve means:
    1) New loans replace the good old ones.
    2) The value of new loans is higher than those of old.

    This has to be done despite the real affordability of the new loans, and without regard to the long-term consequences for all concerned.

    • Hi Buzzin

      For the establishment this is what is known as a win-win situation. They can tell people they are better off via omitting the higher house prices from inflation and claiming wealth and GDP are higher. The same situation helps the bank balance sheets as you say. We now know why because without all this more than a few of them would have gone under.

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