The ethical problems of UK banking continue to pile up

On Friday Bank of England Governor Mark Carney was in full flow at Thomson Reuters headquarters in London. In particular he wanted to lecture us about the improvements in ethical standards at the Bank of England and in banking more generally.

The high road to a responsible, open financial system

Okay so what does that mean?

The financial system is fairer because of reforms that are ending the era of “too big to fail” banks and
addressing the root causes of a torrent of misconduct.

I am sure that many of you will be wondering about how he defines the word “fairer” or how the many mergers that were a feature of the UK response to the credit crunch helped end “too big to fail”? The creation of a mega bank by merger Lloyds with Halifax Bank of Scotland for example surely only made the situation more acute. As to addressing the root cause of misconduct we still actually await this happening in practice.

There was plenty of high-flying rhetoric to be found.

On one path, we can build a more effective,
resilient system on the new pillars of responsible financial globalisation.

The new buzz phrase is “efficient resilence” which if the previous buzz words and phrases are any guide ( temporary…… vigilant etc.) will mean anything but! Here is how Mark describes it.

Finally, efficient resilience is why the Bank of England, working with the Financial Conduct Authority, has
been at the forefront of efforts to increase individual accountability in financial services. While the UK’s
action plan to improve conduct includes stronger deterrents and reduced opportunities for bad behaviour, we
recognise that ex post penalties are only part of the solution.

Events other the weekend have brought the claims and boasts of the section below into focus.

To put greater emphasis on individual accountability, the UK has introduced new compensation rules that go
much further than other jurisdictions in aligning risk and reward. And we have put greater stress on the
importance of better governance and firm culture. …
Since codes are of little use if no one reads, follows or enforces them, the UK has instituted a unique Senior
Managers Regime to embed cultures of risk awareness, openness and ethical behaviour. Based on its early
successes, international authorities are now considering following the UK’s lead.

Barclays

Let us see if this is one of the early successes? It too has the rhetoric with its values of  Respect,  Integrity,  Service,  Excellence,  Stewardship or RISES program. ( https://www.home.barclays/about-barclays/barclays-values.html )

Barclays PLC and Barclays Bank PLC (Barclays) announce that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have commenced investigations into:

·    Jes Staley, Group Chief Executive Officer of Barclays, as to his individual conduct and senior manager responsibilities relating to Barclays whistleblowing programme and an attempt by Mr Staley in 2016 to identify the author of a letter that was treated by Barclays Bank PLC as a whistleblow; and  

We are expected to believe apparently it was all just a misunderstanding.

The Board has concluded that Jes Staley, Group Chief Executive Officer, honestly, but mistakenly, believed that it was permissible to identify the author of the letter and has accepted his explanation that he was trying to protect a colleague who had experienced personal difficulties in the past from what he believed to be an unfair attack, and has accepted his apology

I would imagine that pretty much everyone reading this is aware of modern whistleblowing procedures so it seems strange that the CEO of Barclays was not. Actually even when he was told he had another go a month later.

There is a clear example of “back to the future” when we note that rather than being sacked we move into Yes Prime Minister land as he will receive one of the “strongly worded letters” so beloved of the apochryphal civil servant Sir Humphrey Appleby! We are told there will be this too “a very significant compensation adjustment will be made to Mr Staley’s variable compensation award.” But as it is “variable” how will we know?

The Bank of England

There is bad news in the offing tonight for the Bank of England as the BBC’s Panorama has looked again at its role in Libor ( London Interbank Offered Rate ) rigging.

A secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama.

The 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down.

Well done to Andy Verity for continuing to pursue this issue and along the way we meet some old “friends”

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England.

It is like a television series with a regular cast isn’t it? Also the BBC does not do Paul Tucker full justice as there was this from 2013.

Paul Tucker, who served as a deputy governor at the Bank of England, has been given a knighthood for services to central banking.

Some might think that a substantial salary and a pension which would current cost around £7 million to buy were rewards enough in themselves. Unless of course you believe that Paul Tucker got his “K” for covering things up.

Comment

There is much to consider here and in the individual case of Governor Carney the Libor or as it became named the Liebor issue predated his arrival. However he has his own problems. The most recent was the resignation of Charlotte Hogg who seemed as uninformed about monetary policy as she was about the consequences of her bother’s job. It was put well by Deborah Orr in the Guardian.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Only on Thursday we looked at Gertjan Vlieghe and his problems understanding that once he was at the Bank of England he had to break his financial links with the hedge fund Brevan Howard. Hardly a brave new dawn is it?

Meanwhile if we look back to the effective bailout by the Qataris of Barclays back in the day we wonder how the court case into this will play out? It is all quite a mess is we throw in PPI miss selling and the way that small businesses were miss sold interest-rate swaps as well as those who became “mortgage prisoners”.

Meanwhile though in Mark Carney’s world it is all going rather well.

Being at the heart of the global financial system reinforces the ability of the rest of the UK economy, from
manufacturing to the creative industries, to compete globally. And it broadens the investment opportunities
for UK savers, giving them the potential to earn better risk-adjusted returns.

Do UK savers realise how good they apparently have it? Oh and was the Barclays story released today to help take the pressure off the Bank of England Liebor news?

 

 

The ongoing disaster that is Novo Banco of Portugal

A constant theme of this website is an ongoing consequence of the credit crunch where more than a few banks have not been reformed and are still damaged goods. They are banks which were somewhat presciently sung about by the Cranberries.

Zombie, zombie, zombie

Certainly in that list was Banco Espirito Santo of Portugal which found itself in a spider’s web of corruption and bad loans. This led to this being announced by the Bank of Portugal in August 2014.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets.

The point of this was supposed to be that Novo Banco would then be like its name, a New Bank. It would be clean of the past problems and would then thrive and the bad bank elements would be removed. Reuters took up the story.

Novo Banco, or New Bank – will be recapitalised to the tune of 4.9 billion euros by a special bank resolution fund created in 2012. The Portuguese state will lend the fund 4.4 billion euros.

At the time there were various issues as Portugal itself had only recently departed an IMF bailout so was not keen to explicitly bailout BES. Thus the bank resolution fund was used except of course it had nowhere near enough money so the state lent it most of it. These sort of Special Purpose vehicles are invariably employed to try to keep the debt out of the national debt. To be fair to Eurostat that usually does not work but left an awkward situation going forwards where in theory the other Portuguese banks created Novo Banco but in reality the Portuguese taxpayer provided most of the cash.

Novo Banco

As regular readers will be aware investors in Novo Banco later discovered that the word “clean” was a relative and not an absolute term.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

This may have happened just after Christmas 2015 but there was no present here for the holders of these bonds who found them worth zero. To say that institutional investors were unhappy would be an understatement and I will return to this later but for now I just wish to point out that the bill is escalating and also how can a clean new bank have to do this?

The sale of Novo Banco

There were various efforts to sell Novo Banco which went nowhere and of course trust in the Bank of Portugal was damaged by what happened above which added to the misrepresentations issued by it as BES declined. Just over a year ago it published this.

Banco de Portugal has defined the terms of the new sale process of Novo Banco, following the re-launch announced on 15 January 2016.

This January the Lex Column of the Financial Times pointed out why buyers have been in short supply.

Available for purchase: one crippled bank suffering from poor credit quality and high costs. Location: Portugal. Important information: Potential for future damages arising from litigious creditors. The sale prospectus for Novo Banco does not look enticing.

It gets worse.

Quarterly losses since Novo’s creation have averaged €250m. A quarter of all loans are delinquent or “at risk” of being so.

Again we are left wondering exactly how the Bank of Portugal defines the word “clean”?! But whilst the FT thought there were bidders it looks to me that the only player was the appropriately named Lone Star.

Lone Star

What happened late on Friday was summarised by Patricia Kowsman of the Wall Street Journal.

Dallas-based Lone Star will inject €1 billion ($1.07 billion) in Novo Banco for a 75% stake, while a resolution fund supported by the system’s banks will hold the remainder. The setup could ultimately leave Portuguese taxpayers exposed to losses, which is what the country’s central bank had tried to avoid when it imposed a resolution on the lender almost three years ago.

Actually they are only paying 750 million Euros up front with the rest by 2020. But as we number crunch this there are a lot of problems.

  1. The nearly 2 billion Euros of bonds written off do not seem to have made the situation much better.
  2. The Portuguese Resolution Fund put in 4.9 billion Euros for a bank which is now apparently worth 1 and 1/3 billion.

The Resolution Fund took steps last September to cover this.

the maturity date of the loan will be adjusted so as to ensure that it will not be necessary to raise special contributions,

I would like to take you back to August 2014 when it told us this.

Therefore this operation will eventually involve no costs for public funds………..This applies even in exceptional cases, such as this one, in which the State is called upon to provide temporary financial support to the Resolution Fund, as that support will later be repaid (and remunerated through payment of interest) by the Fund.

The use of the word “temporary” was a warning as its official use is invariably the complete opposite of that to be found in a dictionary. Also I am reminded of my time line for a banking collapse.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

Back in August 2014 we were told this. From Reuters.

“The plan carries no risk to public finances or taxpayers,” Carlos Costa, the central bank governor, told reporters in a late night news conference in Lisbon.

Litigation

You might think that things could not get much worse. Yet apparently they continue to do so. From Reuters.

Blackrock and other asset management institutions are seeking an injunction this week to block the sale of Portugal’s Novo Banco to U.S. private equity firm Lone Star.

Okay why?

The bond transfer had caused losses of about 1.5 billion for ordinary retail investors and pensioners

Comment

A critique of the banking bailouts has been the phrase “privatisation of profits and socialisation of losses ” and we see this at play here. Whilst there is a veil of a Special Purpose Vehicle ( the Resolution Fund) the Portuguese taxpayer has had to borrow money to back most of it. It is plain that we were not told the truth or anything remotely like the truth when a “clean” bank was created. As no cash at all has been returned from the sale of Novo Banco – the funds are to boost bank capital – they are left hoping that one day the money will be repaid except they have been diluted by a factor of four.

Let us take a happy scenario where Novo Banco now does well the majority of the gains will go to Lone Star and a minority to the Resolution Fund. So the minor stakeholder gets the majority of the returns? Oh and even worse the Fund is backing another sector of potential losses. From the Algarve Daily News.

In a statement issued today, PS party leader Carlos César says MPs “should know in detail all the preparatory and contractual aspects of the sale operation” – bearing in mind the State has no say in the bank’s management, but is guaranteeing to underwrite extraordinary losses of up to €4 billion.

In a happy scenario the other Portuguese banks will be likely to be able to put some extra money into the Resolution Fund but of course many of them have their own problems and the Portuguese economy could do with them backing it.

And a bad scenario? Well look at the sums above……..

 

 

 

Can the economy of Italy throw off its past shackles?

It is time to take another look at how the economy of Italy is performing and first let me point out that the backdrop is good. What I mean by that is that the outlook for the Euro area is currently rather good with this being reported by Markit at the end of last week.

Eurozone economic growth gathered further momentum in March, according to PMI® survey data, reaching a near six-year high…….The March flash PMI rounds off the best quarter for six years and signals GDP growth of 0.6% in the first quarter

That has been followed this morning by better news on the inflation front for March as lower petrol and diesel prices have pulled back both Spanish and some German regional inflation from the February highs this morning. Actually Spanish inflation seems very volatile and therefore difficult to read but this month’s picture seems lower than last even allowing for that. But overall there seem to be some economic silver linings around albeit that there was a cloud or two as the credit data lost some momentum.

What about Italy?

The sentiment numbers here released yesterday were positive as well.

With regard to the consumer survey, the confidence climate index grew in March 2017 from 106.6 to 107.6……With reference to the business surveys, the composite business confidence climate index (IESI, Istat Economic Sentiment Indicator) increased from 104.3 to 105.1.

However there was something rather Italian in all of this good news as I note this.

while the personal and current components worsened from 102.1 to 101.0 and from 104.7 to 104.5

Whilst the outlook is favourable it does not seem to have impacted so far on Italians themselves.

What about industry?

On Tuesday the Italian statistics office served up a swerving serve that Roger Federer would be proud of as its headline showed both industrial turnover (1.9%) and new orders (8.6%) rising. But if we look deeper as there were 21 days this year as opposed to 19 last we see this.

In January 2017 the seasonally adjusted turnover index decreased by -3.5% compared to the previous month (-2.3% in domestic market and -5.4% in non-domestic market)……..In January 2017 the seasonally adjusted industrial new orders index decreased by -2.9% compared with December 2016 (-6.6% in domestic market and +2.6% in non-domestic market).

So it was a bad January meaning that quarterly growth fell to 1.7% for turnover and 0.8% for new orders.

If we look for context of the Italian problem we see some of it in the underlying index which was set at 100 in 2010 and has now risen to 100.3. If we look further we see another sign as the growth has been export-led (121.7) whereas the domestic market has fallen to 91.5. Thus the domestic numbers are more depressionary than recessionary.

If we move to production we see that it fell by 0.5% in January leaving it at 93.8% of the level seen in 2010.

Retail Sales

If we look at the latest data we see that the better sentiment has yet to impact here.

In January 2017 the seasonally adjusted retail trade index increased by 1.4% with respect to December 2016 (+2.3% for food goods and +0.8% for non-food goods). The average of the last three months compared to the previous three months was unvaried. The unadjusted index decreased by 0.1% with respect to January 2016.

The underlying index returns us to thoughts of an economic depression as this time an index set at 100 in 2010 compares to 95.7 in January.

Employment and Unemployment

This continues a rather troubled pattern so let us start with the good bit.

The labour input used in the economic system (expressed by the hours worked in the national accounts) increased by 0.4% quarter-on-quarter and by 1.6% year-over-year.

So there is more work around but because of the past pattern it is hard to look past this.

The unemployment rate confirmed at 11.9%, up by 0.2 percentage points after the substantial stability over the four previous quarters.

Some of that is technical as the particpation rate rose reversing for example some of the arguments over the US labour market but it is also true that the previous year saw unemployment rise by 108,000. So we see that this problem is persisting when if we look at other metrics it should not be.

Also we get a clue perhaps as to the current issues with retail sales as we note that real wages are under pressure.

as a result of a 0.2% increase in wages ( in 2016).

 

Population

The numbers for 2016 are out and they tell us this.

The population at 1st January 2017 was estimated to be 60,579,000; the decrease on the previous year was 86,000 units (-1.4 per thousand).

This happened in spite of the growth from migration.

The net international migration in 2016 amounted to +135 thousand, a similar level to that seen in 2015. Compared to the latter it was determined by a higher number of inflows, 293 thousand, and a new record of outflows, for the recent time, equal to 157 thousand.

As we see people are leaving but are being replaced and some presumably mostly by those crossing the Mediterranean.

Also the demographics clock continued to tick. However let me also welcome this as people are living longer.

The mean age of the population at 1st January 2017 was 44.9 years, two tenths more than in 2016.

The banks

This has become a little like the never-ending story. After all what news is there some 3 months down the road after the announcement of a bailout for Monte Paschi. Well according to Bloomberg there are ongoing arguments.

In the view of some ECB Supervisory Board members, while Monte Paschi cleared the hurdles for aid, its viability was bolstered by unrealistic valuations of its bad loan portfolio, the people said. The board gave the all-clear even though the possibility that Monte Paschi sold junior bonds inappropriately to retail investors wasn’t fully reflected in the solvency assessment, they said.

There is also the issue of what will happen to Banca Popolare di Vicenza and Veneto Banca. The official view is that this will be solved “soon” which is a line they also use for Greece.

Also remember the Atlante bailout fund which was supposed to rescue things which rather embarrassingly was followed by Atlante 11 as it needed more funds, how is it going? From Teleborsa.

Intesa Sanpaolo is not prepared to add other loans in the Fund Atlas. It does not leave space for imagination Carlo Messina, CEO of the banking group……..”There is no doubt that today the one to which we must aim is to safeguard the investment made in Atlas “

Perhaps he is worried by this in 24 ORE.

Altogether, as reconstructed by Radiocor Plus, the adjustments made by the top 12 Italian banks that have joined Atlas amounted to 1.01 billion, compared with 1.98 billion actually paid into the fund on December 31 last year (about l ‘ 80% of the 2.45 billion total commitment declared by the main institutions). Less than a year after the birth of the fund, the average write-down was then 51.2% of actual amounts paid.

Comment

As ever there is much to consider and if we look at the forecast of the Bank of Italy against what is for once a favourable backdrop I am reminded of the “Girlfriend in a Coma” theme of Bill Emmott.

We expect GDP to expand, on an annual basis, by 0.9 per cent this year and the next and by 1.1 per cent in 2018 and 2019.

This reinforces my theme that even in the good years Italy manages around 1% economic growth which means that by the time we allow for downturns it is on a road to nowhere. Actually that explains its experience in the Euro area and as the population has grown it has seen GDP per capita fall by around 6%.

If we move to the banking sector we see something very sclerotic which is plainly holding the economy back as we not even the official data shows Non-Performing Loans at 16.24% of the total. If it is true that the Monte Paschi numbers have been “massaged” (again…) then I fear for what the real number is. Yet real reform never seems to actually turn up as we mull another apparently never-ending story.

 

 

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,

 

 

The claims of Grecovery turned into a continuing economic depression for Greece

Today has started with something that has become all to familiar over the past 7 or so years. From Kathimerini.

Greek farmers protesting against bailout-related income cuts are clashing with riot police outside the agriculture ministry in central Athens.

Police fired tear gas to prevent farmers from forcing their way into the ministry building, while protesters responded by throwing stones.

This is of course the human side of the austerity regime which has been applied to Greece again and again and again.

Protesters are angry at increases in their tax and social security contributions, part of the income and spending cuts Greece’s left-led government has implemented to meet bailout creditor-demanded budget targets.

Yet sadly there is also a theme where some as in those at the higher echelons of society are more equal than others. From Keep Talking Greece.

Greece’s ministers, lawmakers, mayors and other high-ranking public officials are able to enjoy generous tax reductions reaching up to 2,000 euros per year.

Even worse this was tucked away in a 2016 bill which did this.

The provision was included in the law to decrease or even cut the poverty allowance to thousands of low-pensioners.

Many of the problems could have been avoided if Greece had found a way to tax the wealthy. Yet they seem to continue on their not very merry way.

It appears that the former head of gas grid operator DESFA, Sotiris Nikas, granted himself a promotion that boosted his retirement lump sum by 100,000 euros to 258,000 euros, ( Kathimerini)

What about economic growth?

There was a familiar pattern to those who have followed the Greek economic depression as  From Keep Talking Greece.

Greece’s Prime Minister Alexis Tsipras was confident that the times of recession were over and that “Greece has returned back to growth” as he told his cabinet ministers……..After seven years of recession, Greece has returned to positive growth rates he underlined.

Reality was not a friend to Mr. Tsipras as soon after the Greek statistics office released this.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016, against the decrease of 0.4% that was announced for the flash estimate

Which meant this.

In comparison with the 4th quarter of 2015, it decreased by 1.1% against the increase of 0.3% that was announced for the flash estimate of the 4th quarter.

If we look at the pattern then it has turned out to be what economists call an “L” shaped recovery or in fact no recovery at all. What I mean by this is that the Greek economy as measured by GDP (2010 prices) peaked at 63.3 billion Euros as the output for the second quarter of 2007 and then fell to  46 billion Euros per quarter as 2013 started and is still there. Remember all those who proclaimed that so-called “Grecovery” was just around the corner? Well it was a straight road and in fact had a gentle decline as the latest quarter had a GDP of 45.8 billion Euros. Thus the Greek economic depression over the last decade has involved a contraction of economic output of 28%.

If you prefer that in chart form here it is.

Yet the Institutions as the Troika are now called stick their collective heads in the sand.From Amna on the 7th of February.

The recent IMF report saying that Greece’s debt load is unsustainable was “unnecessarily pessimistic,” Eurogroup President Jeroen Dijsselbloem said on Tuesday.

The banks

Where an economy is really in trouble then we can find a banking system which has had a type of heart attack and the Greek banking system did as Kathimerini points out.

the huge pool of NPLs ( Non Performing Loans) in Greece that now add up to 107 billion euros after their increase by 1.5 billion in the first couple of months of 2017.

As to the deposits in the banks they have yet to regain the losses of 2015. Care is needed about the many claims that bank deposits have plunged again as the numbers has seen some ch-ch-changes with the order of 6 billion Euros removed. Any way the recent peak at 179.1 billion Euros for domestic residents the the summer of 2014 compares with 130..9 billion Euros in January.

The main growth industry for Greek banks seems to be this.

Eurobank Financial Planning Services (FPS), is the second bad-loan management firm to obtain a license from the Greek authorities to operate in the local market. It follows the permit issued to Cepal, a joint venture by Alpha Bank and Aktua.

On my way to looking at past house prices I found the Bank of Greece 2008 Interim Report which told us this.

the Greek banking system remains fundamentally sound, safe and stable.

Oh and this.

In the euro area, the situation is less worrying than in the United States as far as financial stability is concerned; however, risks of a deterioration do exist.

House prices

It was only yesterday I was looking at the central role of house prices in the UK economy but in spite of a barrage of measures the ECB ( European Central Bank) has failed to influence them much at all.

According to data collected from credit institutions, nominal apartment prices are estimated to have declined marginally on average by 0.6% year-on-year in the fourth quarter of 2016, whilst in 2016 as a whole apartment prices fell on average by 2.2%, compared with an average drop of 5.1% in 2015. ( Bank of Greece )

Ironically that is the sort of medicine which would benefit the UK but for Greece there has been another feature of the economic depression where “apartment prices” have fallen by 40% since 2007.

The shadow economy

The shadow or unrecorded economy has seen a few name changes in recent times but I have been trying to find out more about it in Greece since the crisis began. Yesterday there was a flash of light from Bloomberg.

When Maria’s employer, a large communications company in Athens, gave her additional tasks at one of its new units, it told her she wouldn’t be paid for the work in euros.

“I was informed that this extra payment of 150 euros per month would be in coupons that I can use in supermarkets,” said the 45-year-old, declining to provide her last name for fear of losing her job.

So as the austerity grip tightens more slips through the net.

Payments in kind are among practices companies are using in Greece as they seek to cap payroll costs, undermining efforts to balance the books of the country’s cash-strapped social security system………By some estimates, the so-called black market already accounts for as much as a quarter of Greece’s economy.

What we would like to know is how much the size of the shadow economy has grown. The fact that it has grown seems beyond doubt but how much?

Comment

As the Greek economic depression heads towards the decade mark where even “lost decade” simply does not cut it there have been many themes. A sad one I found in the 2008 Bank of Greece report which told us about structural reform, yes the same structural reform that is still being promised now.

Some time ago I wrote about the “Roads To Nowhere” in Portugal which were empty because of the high tolls charged. Well here is a view on Greece.

It’s often cheaper to fly to Berlin than pay the road tolls for a small car from Thessaloniki (Greece’s 2nd city) to Athens…….The insanely priced and ever growing road toll network in Greece is a major drag on economic development.Roads too expensive for many to use (h/t @teacherdude )

International Women’s Day

Let me mark this with the exchange between Sarah Jane of Sky News and Lord Heseltine.

Lord Heseltine: ‘She’s got a man-sized job to do’ : ‘It’s a woman-size job now’ ( about Prime Minster Theresa May)

This led to some humour from Charlie Reynolds

If I was Michael Heseltine’s mother’s dog I’d watch my step today

 

 

 

 

Will the UK taxpayer ever get back the money invested in Royal Bank of Scotland?

Today we find ourselves arriving at what has become an annual event although sadly there is never any money for a party although we are invariably promised that there will be plenty of cash next year. This is of course the announcement of more bad figures from Royal Bank of Scotland as we look back over all the promises made on its behalf which stretch back now to the beginning of the credit crunch. Let us step back in time to the 13th of October 2008.and see what the then Chancellor Alistair Darling told us  in the Guardian.

There is every reason to be confident that, as we go through this, the British taxpayer will get his money back.

The UK taxpayer invested at around £5 per share and this morning’s price is £2.44 so it looks as though Alistair will have to remain confident for quite some time and maybe forever. Also we learn that so-called alternative facts come from official sources as well as unofficial. But as time has passed others have proclaimed triumph only to see disaster.

Here is The International Financing Review from 2012.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

I am not sure how much more they could have been wrong! But they were not alone as this from a former employer of mine Union Bank of Switzerland proves.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues.

We can put that as a clear fail as the 2017 figures will show us later as we mull whether RBS will ever be able to sing along with Taylor Swift regarding legacy issues.

Baby, I’m just gonna shake, shake, shake, shake, shake
I shake it off, I shake it off

Along the way we have at least managed a little humour as this from Bluebullet on Twitter from 3 years ago shows.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Today’s data

Chief Executive Ross McEwan told us this only last year.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

 

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

Does he think so? Well according to this in the Guardian he does although you may spot the bit that makes him think so.

“The bottom line loss we have reported today is, of course, disappointing but given the scale of the legacy issues we worked through in 2016, it should not come as a surprise,” said the RBS chief executive, Ross McEwan, who was paid £3.5m for 2016.

Okay so what was the loss declared?

Royal Bank of Scotland has reported losses of £7bn for 2016, taking its losses since its 2008 government bailout to more than £58bn.

 

The taxpayer-backed bank has also admitted that it will not return to profit until 2018, indicating that it will report 10 years of losses before it returns to the black.

There are a litany of issues here as we note yet another large loss. For Mr McEwan there is an awkward trend to explain as losses have gone £1.5 billion then £2 billion and now £7 billion as he has promised improvements. For the UK taxpayer there is the issue that the losses since the bailout are now larger than the funds invested. Next there is the fact that things are apparently so bad even these serial fakers cannot claim a profit is just around the corner!

If we switch to the Financial Times we see two of my themes being deployed as a defensive mechanism. Firstly losses are always described as a one-off which are nine years and rising of them is risible and secondly the way a bit like inflation measure we keep getting them until the “correct answer” is given.

In total, these one-off conduct and restructuring costs amount to £10bn. This pushed down the bank’s capital reserves, with the common equity tier one ratio dropping to 13.4 per cent, from 15.5 per cent a year ago. On a pre-tax basis, RBS reported an operating loss of £4.1bn, compared to a £2.7bn loss a year earlier. Its core business, comprising commercial and retail banking, delivered its eighth successive quarter of £1bn operating profit, stripping out one-off items.

So it made a profit right?

Reform

I have been critical of other countries on such matters so it is now time to apply similar methodology to the UK and the botched efforts with Williams & Glyns should lead to sackings of those involved. From the Financial Times.

This includes the £750m cost for the new Williams & Glyn plan unveiled last week. RBS has spent some £1.8bn over a number of years on attempting to divest Williams & Glyn.

They have splashed the cash and then given up after buying time with our money in a saga rather like Novo Banco in Portugal.

There are also more problems on the horizon as of course RBS was involved in so much miss selling and the issues with small businesses seem to just grow and grow. As to optimism well there does not seem to be much on display here in this from the Financial Times.

Mr McEwan is targeting £750m of cost savings this year, as part of a total £2bn of planned cuts over the four-year period, which is expected to involve hundreds of job losses and branch closures.

Comment

Actually the banking environment is really rather favourable. For example the UK economy returned to solid economic growth nearly four years ago and the Bank of England regularly rustles up a new bank subsidy plan. The latest one called the Term Funding Scheme  has now grown with little public attention to just under £42 billion. On that theme there was this from City AM yesterday.

Mortgage lending hit £18.9bn in January, new figures have shown – two per cent up on the same month last year, and the best January since 2008.

Enough to cheer both a banker’s and a central banker’s heart. Indeed the theme has been reinforced this morning by mortgage approvals rising to above 44,000 in January according to the British Bankers Association. The most similar bank to RBS is Lloyds Banking Group so how did it do this year?

Pre-tax profits increased by 158% to £4.24bn, a level last seen in 2006 before the financial crisis. ( BBC )

Next nearest is Barclays so what about it?

The bank reported a profit before tax of £3.2bn for 2016, up from £1.1bn the year before. ( BBC )

As you can see if they are from Venus RBS looks like it is from Mars. It needs a change and needs to go one way or another. What I mean by that is the taxpayer should fully own it and raise the current stake of around 72% to 100% or it should be sold-off and left to stand on its own. The current half-way house is doing no good at all. The fact that Lloyds is now nearly fully in the private sector ( ~96% of shares) is a guide but maybe not as much as we think as of course the shares were more easily sold off because it was already doing better than RBS.

 

Could the Bank of England end up taking over the Co-op Bank?

One of the consequences of the credit crunch and the consequent banking bailouts is the way that the banks dominate financial life. We can in fact take that further because in the same way that British Airways was described as a pension fund with an airline subsidiary can we now be described as a financial sector with a real economy subsidiary? It so often feels like that.

Actually there is some fascinating number-crunching we can do as banks interact with central banks and as so often ECB (European Central Bank) gives us food for thought. Earlier @insidegame pointed out this.

ECB deposit facility usage €495.763 billion.

Interesting that banks are so willing to deposit at an interest-rate of -0.4% is it not? That hardly suggests confidence in the system. Well there is another 955.27 billion Euros held by them in the ECB current account at the same -0.4% interest-rate. Indeed at a time of apparent economic success someone is also borrowing some 590 million from the Marginal Lending Facility.

Marginal lending facility in order to obtain overnight liquidity from the central bank, against the presentation of sufficient eligible assets;

There is more to consider as we note that what is supposed to be a penal interest-rate is a mere 0.25%.

Co-op Bank

This is an institution about which Taylor Swift might well have written “trouble,trouble,trouble” for. This morning the Co-op group has announced this.

As a minority investor in The Co-operative Bank, the Co-op Group is supportive of the plan to find the Bank a new home. We will continue to work with the Bank and other investors through the process. We are focused on finding the best outcome for our members, two million of whom are Bank customers, as well as the members of our shared pension scheme which is well funded and supported by the Group. Our goal is to ensure the continued provision of the type of co-operative banking products our members want.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis.

Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

The shares are privately owned so prices are not published but we are told this about trading and prices.

Shares in the Manchester, England-based lender, which don’t trade publicly, are quoted between 10 pence and 30 pence by investment banks offering private trading among institutional investors, said the people who asked not to be identified because they weren’t authorized to speak publicly. The shares were worth about 3 pounds after the bank was rescued by bondholders in 2013, falling to about 50 pence in September before plummeting in recent weeks amid questions over its financial strength, the people added.

There are two initial issues raised by this. The first is that “worth” is not the same as price and related to that I would say that the £3 price after the 2013 rescue was a combination of a false market and wishful thinking. In a closed private market, how can I put this? You can pretty much price it as you like and wait and see if anyone is silly enough to buy at that price? I think we are clear now that the answer was no! So the fall in the price has in my opinion been more an acquaintance with reality than any real change.

The institution would already have been on the radar of the Bank of England.

Co-Op Bank will probably operate below regulatory capital guidance until at least 2020, the bank said Jan. 26, as it replaces crumbling IT systems and separates its pension fund from its former parent.

One thing that raises a wry smile is that the banks are always described as having “crumbling IT systems”. How can this be when pre credit crunch we were told that they were run by people of such talent that they deserved vast salaries and remuneration packages? Someone should try a case for miss selling there. I believe the Co-op Bank has now outsourced such matters to IBM.

The Prudential Regulation Authority or PRA has been looking into this although its moves are awkward in the sense that they give the Co-op bank another downwards push.

The PRA increased its so-called Pillar 2A capital requirements, financial buffers linked to a lender’s idiosyncratic risks, to 14.1 percent of risk-weighted assets in November. By contrast, the level set for Lloyds Banking Group Plc, Britain’s largest mortgage lender, is 4.5 percent.

Bonds,Bonds Bonds

There is no bull market here indeed we see the reverse as the Co-op Bank’s bonds have seen quite a bear market.

The bank’s 206 million pounds of junior bonds due December 2023 dropped 4 pence to 45 pence on the pound on Wednesday, according to data compiled by Bloomberg, while 400 million pounds of senior bonds maturing in September this year were little changed at 85 pence, with a yield of 34.5 percent.

In these times of zero and indeed negative interest-rates which we reminded ourselves about at the opening of this article an interest-rate of 34.5% can be described thus.

Danger, Will Robinson! Danger!

The official view is quite different as the BBC explains.

The bank has four million customers and is well known for its ethical standpoint, which it says makes it “a strong franchise with significant potential” when it comes to a sale.

This seems like a reality was a friend of mine moment, or of course perhaps viewed through the prism of its previous drug-taking chairman Paul Flowers, who pursued the new methods of counting GDP with quite an enthusiasm. Meanwhile the last Fitch Report told a different tale.

Co-op Bank’s relaunch is crucial for it to become a viable business, but losses and capital erosion continue to hamper its progress. We expect Co-op Bank to report losses until at least 2017, and significant investment in new systems could extend losses into the medium term. Profitability should begin to benefit in 2018 when fair value adjustments related to the 2009 acquisition of Britannia Building Society are fully unwound.

Comment

This is a sad, sad story as there is much to recommend mutual organisations although of course much of that disappeared in the 2013 rescue. When the credit crunch hit there were hopes ( including mine) that the mutual system might help but sadly it has done little if any better than the share owned banks. The same greed culture ravaged it and may yet ravage us as taxpayers. This is particularly disappointing from an organisation which has promoted itself ad being based on ethical foundations.

Right now the Bank of England will be trying to encourage and goad someone into buying this. The problem is that the shortlist at the moment has one maybe which is the TSB. 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. A bit like the rule that you never buy a share until the third profit warning. After all if the outlook was good the hedge funds would keep it wouldn’t they? So there remains a genuine danger that the Bank of England will end up stepping up and apply its new bank resolution procedure. At such a time it would be on my timeline for such events.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

As to the individuals concerned there is this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforeseen difficulties”.