It is all about the banks once again

As so often we find ourselves returning to the topic of the banks as they are at the heart of the financial system. They are the group which most exemplify the dictum if you want to enrich yourself get as close as you can to flows of money. The best description of this was provided by Matt Taibbi some years ago.

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

Now we find ourselves in a situation where central banks are hurriedly devising schemes to protect the banking sector which is odd in a way for something they have kept describing as “resilient”. Of course the original medicine of interest-rate cuts has turned into an overdose as the banks remain terrified of the consequences of reducing interest-rates for the ordinary depositor below 0% in case it creates a run on deposits. Such a thing which expose some of the illusions that banking relies on. So now we have other policies such as more Quantitative Easing of which there will be an extra £4.5 billion in the UK today for example. Also we are in an era of “credit easing” with what is called the Term Funding Scheme for Small and Medium-sized Enterprises or TFSME as below.

 In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate……….Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Last time around the money leaked straight into the mortgage market thus providing a double boost for the banks as they were able to lend out funds they got cheaply as well as boost their balance sheet as the consequent higher house prices improve their mortgage book.

But in spite of that there are plenty of signs of this.

Trouble, trouble, trouble
Oh, oh
Trouble, trouble, trouble ( Taylor Swift).

Lloyds Bank

Let me give you a different perspective on this with some news that flashed a warning sign yesterday.

*LLOYDS BANK STARTS CASH TENDER FOR 12% PERPETUAL CAP SECURITIES Wow, this is stunning. ( @jeuasommenulle)

These securities are part of the capital of a bank and some US $2 billion was issued. As junior subordianated debt it is not at the top of the line but this is hardly the time for a buyback of any sort of capital especially when we note the news below. Switching to the interest-rate well that is what banks had to pay when the credit crunch was raging in last 2009.

This poses a question of why the Bank of England is allowing this? Which leads to the conclusion that one of the holders of the bond may be desperate for cash/liquidity and is being offered a type of out or if you prefer an olive branch. Regular readers are unlikely to be surprised by this being in US Dollars.

Dividends

According to the Financial Times these are something for yesterday and some unspecified date in the future but not now.

The UK’s largest lenders bowed to pressure from Britain’s top financial regulator and halted their dividends after they were warned against paying out billions of pounds to shareholders during the coronavirus pandemic. In a series of co-ordinated statements on Tuesday evening, Lloyds, RBS, Barclays, HSBC, Santander and Standard Chartered said they would cancel their dividends for 2019 and refrain from setting cash aside for investor payouts this year. They also pledged not to carry out any share buybacks.

So the banks will save the amount below and accordingly get a capital boost.

By bowing to the regulator’s wishes on dividends, the banks have avoided being subjected to formal action. But the decision to cancel last year’s payouts — worth £7.5bn — will prove unpopular with some investors, especially retail shareholders who rely on the payout for their income.

Investors though who have been hoping for dividends will lose out. Now whilst owning a share is supposed to be risky there is an awkward optic here in the era of central bank put options for equities as well as the fact that some of these had been announced.

The Asia-focused bank had been due to pay a dividend totalling $4.2bn on April 14. HSBC’s Hong Kong-listed shares fell as much as 9.9 per cent on Wednesday morning…….Barclays had been due to pay a full-year dividend of 6p per share on Friday, worth roughly £1bn.

Bonuses

These too are supposed to be put on hold.

The regulator also said it “expects” the banks and Nationwide, the building society, to refrain from paying any cash bonuses to senior staff and signalled they should stop setting money aside for variable pay during the “coming months”. ( Financial Times )

As someone who is suspicious of such announcements it immediately occurs to me that bonuses in shares are not excluded according to that statement. Furthermore bank shares are very cheap right now, of which more later. So bonuses would probably have been in shares anyway.

If North Man is correct there is also another issue.

Absolute scandal – the banks have just paid their 2019 bonus pools in the LAST 2 WEEKS (e.g. c http://1.bn Barc and c. 3bn HSBC paid out). If a capital cushion is required, why didn’t the PRA ensure these were stopped as well?…….Why doesn’t the FT article mention this – any serious financial article would question why 19 bonuses can be paid, but the 19 dividend can’t and challenge this glaring inconsistency. Surely has to be same treatment for both whether it is pay, cut or suspend.

He has a point I think.

The US Dollar Shortage

I have been writing for a couple of years or so now about the apparent shortage of US Dollars. It would appear that the US Federal Reserve is coming around to my point of view. It was only on the 16th of last month I noted the expansion of its liquidity or FX Swaps. As of last week’s update some US $206 billion was drawn on them. But it seems that was not enough. The emphasis is mine.

The FIMA Repo Facility will allow FIMA account holders, which consist of central banks and other international monetary authorities with accounts at the Federal Reserve Bank of New York, to enter into repurchase agreements with the Federal Reserve. In these transactions, FIMA account holders temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.

 

Comment

The financial system is plainly creaking and clearly so are some of the banks. I have looked above at the issue of US Dollar liquidity and it is not necessarily a shortage of them outright but that now some are considered too risky to be lent them. As banks rely in such flows there is a danger of a financial form of contagion. I doubt it is a coincidence that the bond Lloyds Bank are planning to redeem is US Dollar denominated.

On the other side of the coin the banks are under pressure to support the economy. There must be extraordinary demands on them to support smaller businesses for example. I see the big read in the Financial Times is this.

Will the coronavirus crisis rehabilitate the banks?

I would not be any sort of son if I did not point out that my father’s ashes will be spinning at maximum speed. For newer readers I looked at his experiences with the banks during economic slow downs last Thursday. This from the FT piece is really rather extraordinary.

We are the doctors of the economy now.

If that is a parody then please forgive me for missing it.

Returning to the UK banks we see in an irony of the times the Bank of England remaining a follower of the ECB as it was it who started the dividend suspension theme. However there is a catch which is the effect on already weak bank share prices as we learn there are a lack of free gifts in this area. For example Barclays Bank is at 88 pence as I type this down another 6 pence today. Meanwhile Royal Bank of Scotland in which the UK government invested UK taxpayers money at a bit over £5 is at £1.07 as I type this also down 7 pence today.

Yet Lloyds Bank can apparently buy a bond back? With a share price of 30 pence?

Meanwhile the owner of Brewdog when asked by CNBC if the banks were doing all they can replied.

No I don’t

14 thoughts on “It is all about the banks once again

  1. So they suspend dividends after a 50% fall in their share price, hmmmm….sounds like a few insiders got wind of this a long time ago and dumped their holdings,(see my reference to Barclays dropping 18 consecutive days last week).

    I also remember Shaun’s sarcastic reference to Goldman Sachs coming out with a buy recommendation on gold as being likely due to them having some to sell to someone, GOLDman trading against its clients – some old habits die hard don’t they?Given the recent money printing announced by central banks you would think gold should be $20,000 an ounce not $1,600, there are two theories for why this is the case, the deflation coming is going to be so powerful that it will overwhelm central banks attempts to neutralise it, and the old conspiracy theory that has been proved to to be true – that central banks are shorting it in the paper market to suppress the price of physical, which one is right? Goldman’s buy recommendation should certainly make anyone wary of buying.

    As if trying to make sense of what this corona virus will do to economies was not difficult enough, you have to factor in the fact that central banks are manipulating all markets, this means that keeping keeping your wealth protected from both the coming recession and their actions has become so difficult, it has rendered the decision making process to little more than a coin toss.

    I wonder how long we are away from Barclay’s tapping the market for funds or a bailout by the government considering its recent share price collapse or maybe sell off its investment bank???, watch this space, if there is another leg down I would expect it sometime shortly after.

    • kevin

      I think it was on the cards weeks ago. The present crisis far worse than the 2008 banking crisis imo. Assets are crumbling all around the world, the Airlines in deep trouble and the worldwide lock-down will push many businesses to the wall. The owners of the big shopping malls like INTU in deep trouble they cannot raise money from the market.

      The banks sooner or later would have to cut their dividends which they have now done.

      The question is, is how bad the situation going to get and how long it will last.

      Moat on here never did believe we had already moved out of the last recession because the economy been held up by QE and other fiscal stimulus including low interest rates.

      All I envisage is worst to come and at least another 10 years of more of the same if not standards of living will be even lower this time around and the rich will have to take more of the pain the second time round.

      • Get a house price crash and the standard of living will go through the roof for those that are renting and have been priced out for much of the last 2 decades.

        The amount of extra funds these people have will grow the economy and enable them to start businesses.

        Standard of living for debt monkeys and those reliant on house price inflation will be dreadful though :), though as theyll have to do something productive it’ll also be good for the economy and society as a whole.

  2. When the B of E finally nationalises these wretched institutions, are they under any obligation to retain any staff at above civil service pay grades? We are already see legal, private contracts being ripped up across the board.

    • The bailout of RBS would suggest otherwise, continue as before with state backing to ensure bonuses and illegal practices and fraud are free of risk from prosecution, cost of fines less than gain from fraud/illegal activity= profit and the new business model.

      Barclays and HSBC didn’t take government bailout last time, but this time I don’t think Barclays can survive without some kind of capital injection.

      But don’t believe me, read what Nigel Higgins said regarding the cancellation of the dividend:
      Barclays’s chairman, Nigel Higgins said: “These are difficult decisions, not least in terms of the immediate impact they will have on shareholders. The bank has a strong capital base, but we think it is right and prudent, for the many businesses and people that we support, to take these steps now, and ensure that Barclays is well placed to continue doing what we can to help through this crisis.”

      The bank has a strong capital base errr… yeah right.

      • “..and ensure that Barclays is well placed to continue doing what we can to help through this crisis.”

        what? bu@@er all AGAIN ??

        LOL !

        forbin

  3. Hello Shaun,

    re “The financial system is plainly creaking and clearly so are some of the banks.”

    both were 3 legged donkeys before ………

    with citizens under house arrest and police heavy handedness the rage

    what happened ?

    Bin Laden , Hitler and Napoleon could not achieve this.

    Western Democracy did not go out with a bang , but with a whimper and face mask…..

    Forbin

    • Yep, i walked my kid to Poundland before to get a ball on a rope for the dog. (he keeps losing his “tennis” balls under the chair)

      In fear of being stopped on my way back for unnecessary shopping i bought some toothpaste and diet coke to cover my tracks in fear i’d get my bags searched on the 10 minute walk back to the car.

    • It did take some pressure however to get the banks to pass their dividends they were told to do so as some customers were refused help for loans. I appreciate it puts the banks in a difficult situation as some businesses aren’t viable in any event. But the banks should not be paying out profits not knowing how bad the situation will get. If we ended up with another banking crisis and the banks paid dividends and bonuses they should be prosecuted for reckless conduct.

  4. This is all about 2008.
    The correct response to the coronavirus, is to cloister those at risk, whilst the rest carry on as normal. BUT 2008 just won’t go away, and those responsible still need to avoid the culpability to which they are entitled.
    The only reason the country is under house arrest; the only reason the economy is being collapsed now, is that there is a scapegoat, by the name of “Coronavirus” to help them get off scot-free.
    Bastards!

    • Hi therrawbuzzin

      The other route was to quarantine the area where it started properly as in no flights out and so on. Sadly I feared for a while that we would be incapable of it and the problem has spread. I would much rather have been wrong.

      Now there are inconsistencies as I stay at home and estate agents send workmen to my block. Thanks for that! More serious than for me is that a baby and a child live here.

  5. The clearest sign of how little value banks are perceived to have is that their share prices have dropped to around the lowest levels during the global financial crisis in 2008. Lloyds hit 25p back then compared with 28p today and RBS reached about 85p compared with 107p today. I wonder how long it will be before people start thinking about the possible risk of bail ins or at least withdrawal limits being applied to their money possibly sparking an exit rush to cash, precious metals, bitcoin or whatever. In the current climate anything is possible.

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