Stresses abound at the Bank of England

The last 24 hours have seen something of a flurry of activity from the Bank of England. Yesterday Nishkam High School was the latest stop in what was supposed to be a grand tour of the country by its Chief Economist Andy Haldane. The was designed to show that he is a man of the people and combined with the expected ( by him) triumph of his shock and awe Sledgehammer QE and “muscular” monetary easing of August 2016 was supposed to lead for a chorus of calls for him to be the next Governor of the Bank of England. Whereas in fact he ended up revealing that at another school he had been asked this.

“Two questions”, she said. “Who are you? And why are you here?”

According to Andy this is in fact a triumph.

Several hours of introspection (and therapy) later, I now have an answer. The key comes in how you keep score. If in a classroom of 50 kids you reach only 1, what is
your score? Have you lost 49-1? No. You have won 1-0.

Perhaps that is the dreaded counterfactual in action. Could you imagine going to Roman Abramovich and saying that losing 49 games and winning one is a success? Of course you would be long gone by then. Anyway there is one girl at the “Needs Improvement” school who has shown distinct signs of intelligence as we note for later how Andy’s somewhat scrambled view of success might influence the bank stress tests released this morning.

What about monetary policy?

Andy has a real crisis here as of course he pushed so hard for the easing in August 2016 then a year later ( too late for the inflation it encouraged) started to push for a reversal of the bank rate cut and then voted for that earlier this month. Here is how he reflects on that.

The MPC’s policy actions in November were described as “taking its foot off the accelerator” to hold the car
within its “speed limit”. This was intended to convey the sense of monetary policy slowing the economy
slightly, towards its lower potential growth rate, while still propelling it forward overall.

According to Andy such a metaphor is another triumph.

It was a visual narrative. Because most people (from Derry to Doncaster, Dunfermline to Dunvant, Delphi to Delhi) drive cars, it was a local and personal narrative too. The car metaphor was used extensively by UK media.

Some are much less sure about Andy’s enthusiasm for dumbing down.

Andy Haldane cites the MPC’s recent use of the “car metaphor” as a success in attempting to engage the public. Which is fine. But I’d like to hear his thoughts on damage caused by bad/inaccurate metaphors (eg. “maxing out the country’s credit card”) ( Andy Bruce of Reuters )

Also there was a particularly arrogant section on inflation which I think I am the only person to point out.

This unfamiliarity with economic concepts extends to a lack of understanding of these concepts in practice.
For example, the Bank of England regularly surveys the general public to gauge their views on inflation.
When given a small number of options, less than a quarter of the public typically identify the correct range within which the current inflation rate lies. More than 40% simply say that they do not know.

Perhaps they find from their experience that they cannot believe the numbers and once you look at the data the 40% may simply be informed and honest.

Bank stress tests

The true purpose of a central bank stress test is to make it look like you are doing the job thoroughly whilst making sure that if any bank fails it is only a minor one. Also if any extra capital is required it needs to be kept to a minimum.This was illustrated in 2013 by the European Central Bank. From the Financial Times.

The European Central Bank has appointed consultants who said Anglo Irish was the best bank in the world, three years before it had to be nationalised, to advise on a review of lenders. Consultants Oliver Wyman, which made the embarrassing Anglo Irish assessment in 2006 in a “shareholder performance hall of fame”, has since been involved in bank stress tests in Spain last year and Slovenia this year.

To do this you need a certain degree of intellectual flexibility as Oliver Wyman pointed out.

Today one sees that differently.

Today’s results

Here is the scenario deployed by the Bank of England. From its Governor Mark Carney.

The economic scenario in the 2017 stress test is more severe than the deep recession that followed
the global financial crisis. Vulnerabilities in the global economy trigger a 2.4% fall in world GDP
and a 4.7% fall in UK GDP.
In the stress scenario, there is a sudden reduction in investor appetite for UK assets and sterling
falls sharply, as vulnerabilities associated with the UK’s large current account deficit crystallise.
Bank Rate rises sharply to 4.0% and unemployment more than doubles to 9.5%. UK residential
and commercial real estate prices fall by 33% and 40%, respectively.

Everybody at the Bank of England must have required a cup of calming chamomile tea or perhaps something stronger at the thought of all the hard won property “gains” being eroded. But what did this do to the banks? From the Financial Times.

In the BoE exercise, RBS’s capital ratio fell to a low point of 7 per cent – below its 7.4 per cent minimum “systemic reference point”, while Barclays’ capital ratio fell to a low point of 7.4 per cent – below its 7.9 per cent minimum requirement.

Regular readers will not be surprised to see issues at the still accident prone RBS which always appears to be a year away from improvement. Those who have followed the retrenchment of Barclays such as its retreat from Africa will not be shocked either. Students will also be hoping that falling below the minimum requirement will be graded as a pass by their examiners!

One move the Bank of England has made is this.

The FPC is raising the UK countercyclical capital buffer rate from 0.5% to 1%, with binding effect from
28 November 2018.  This will establish a system-wide UK countercyclical capital buffer of £11.4 billion.

This sounds grand and may be reported by some as such but it is in reality only a type of bureaucratic paper shuffling as the banks already had the capital so reality is unchanged. Oh and we cannot move on without noting the appearance of the central bankers favourite word in this area.

Given the tripling of its capital base and marked improvement in funding profiles over the past
decade, the UK banking system is resilient to the potential risks associated with a disorderly
Brexit.

Comment

We see the UK establishment in full cry. No I do not mean the royal marriage as that is not until next year. But we do see on what might be considered “a good day to bury bad news” with the bank stress tests occupying reporters time this from the Financial Conduct Authority.

The independent review found that there had been widespread inappropriate treatment of SME customers by RBS…….The independent review found that some elements of this inappropriate treatment of customers should also be considered systematic

We may end up wondering how independent the review is as we note it has only taken ten years to come to fruition! People who were bankrupted have suffered immensely in that dilatory time frame. Next on the establishment deployment came as I switched on the television earlier whilst doing some knee rehab to see the ex-wife of a cabinet minister Vicky Pryce expounding on the bank stress tests on BBC Breakfast. If only all convicted criminals saw such open-mindedness.

If we return to Andy Haldane then he deserves a little sympathy on the personal level after all it must be grim doing a tour of the UK when the purpose has long gone. It is revealing that his list of supporters has thinned out considerably although most have done so quietly rather than taking the mea culpa road. At what point will the criteria for success or failure that would be applied to you or I be applied to the Chief Economist at the Bank of England?

 

 

 

 

 

 

Advertisements

When will the UK banks ever fully recover from the credit crunch?

We are now more than a decade away from the first real crisis of the credit crunch era in the UK. That came on the 14th of September 2007 when Northern Rock applied for and received a liquidity support facility from the Bank of England as customers queued at its various branches in an effort to withdraw their deposits. Let us have a brief smile at this from the statement back then.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

It was in fact so solvent that it was nationalised early in 2008! In fact we see another feature of the crisis highlighted by this from the BBC back then.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Hence the advent of more modern definitions of the word temporary as of course the bad part of Northern Rock still is in public hands.

Royal Bank of Scotland

In October 2008 RBS joined the bail out party. From the UK Government.

The Government is making capital investments to RBS, and upon successful merger, HBOS and Lloyds TSB, totaling £37 billion.

“Successful merger” eh?! I will look at Lloyds later but let us continue with RBS which in a clear example of failure was never actually nationalised as the UK establishment indulged its fantasy that enormous investments could be at arm’s-length. Indeed as the National Audit Office ( NAO ) tells us below the government in fact ended up have to have other goes at backing RBS,

To maintain financial stability at the height of the financial crisis, the government injected a total of £45.5 billion into the Royal Bank of Scotland (RBS) between October 2008 and December 2009.

Oh and….

The government intended to return RBS to the private sector as soon as possible

The NAO also calculated a cost for the investment.

The overall investment was equivalent to 502 pence per share.

Although if all the costs are factored in the cost gets even higher.

We have calculated that if the costs of financing the intervention are also taken into account, the government would have had to sell the shares at 625 pence each to break even.

Still with the UK economy having had 4 years of solid economic growth and stock markets around the world at or near all time highs then RBS must be benefiting surely? No as the price this morning is 272 pence per share. This makes even the 2015 sale of some shares look good.

On 4 August 2015, the government sold 630 million shares in RBS (5.4% of the bank) to institutional investors, reducing government’s holding to 72.9%.1 The shares sold for 330 pence each. This represented a 2.3% discount to the market price and raised £2.1 billion.

So a loss but less of a loss than we would see now. Except let us return to a fundamental problem which is that things are supposed to be better now! Or as the International Financing Review put it back in 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.

Still along the way some have at least managed to keep a sense of humour as I pointed out on the 30th of November last year.

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 ( @BlueBullet January 2014).

Yesterday we saw a change in the official response as Sky News reported this.

RBS Chairman has told Sky News taxpayers will not get all of their money back from Government’s bailout following the 2008 financial crisis.

I have a real problem with this which is that any form of honesty takes about a decade. This is far from a UK only problem as foreign bank bailouts have seen their share of misrepresentations and outright lies as well. The problem is the cost as let us start with the £12 billion Rights Issue of 2012 which was based on a prospectus that must have had more holes in it than a swiss cheese. We have seen many scandals which never seem to quite come to fruition as official reports remain a secret. Yet we are forever told that the bailouts were to raise trust in the banks.

Lloyds Bank

This had a more successful effort at selling the shares previously owned by the UK taxpayer. We even got our money back although care is needed as saying that assumes the money was pretty much free which back then it certainly was not. However over the weekend other problems have dogged Lloyds Bank and we are back to bailed out banks behaving badly. Here is the Financial Times on the financial scandal that unfolded at the Reading HBOS  ( Halifax Bank of Scotland) branch.

Yet Lloyds showed little interest in finding out what happened. Not only did the bank brush off Reade’s warnings at the time, but other victims who unearthed evidence of wrongdoing were treated equally dismissively. Far from calling in the police or regulatory authorities, Lloyds maintained right up until the trial’s conclusion that its own internal inquiries had revealed no sign of any criminality.

In other words the bank was able to behave for quite a long time as it was above the law and in fact even now seems able to be its own judge and jury in spite of the fact that it is plainly unfit to do so.

Nothing else can explain the fact that the task of examining Lloyds’ conduct has been given to . . . Lloyds. The bank has commissioned a former judge, Dame Linda Dobbs, to review its response to the Reading incident and whether it complied with all applicable rules and regulations. When complete, this will not be made public and will go only to the board, with a copy being dispatched to the Financial Conduct Authority.

Simply shameful.

Barclays

Barclays escaped an explicit bailout via an investment from the Qataris. That investment provoked all sorts of issues as it appeared some shareholders (them) were more equal than others. As Reuters put it in June.

The SFO charged Varley, Jenkins, the ex-chairman of its Middle East investment banking arm, Kalaris, a former CEO of the bank’s wealth division and Boath, a former European head of financial institutions, after investigating a two-part fundraising that included a $3 billion loan to Qatar.

What could go wrong with lending to someone who buys your shares? Oh and you pay some sweeteners as well. Let us move on noting that Barclays is also in court with Amanda Staveley who arranged another share deal with Abu Dhabi. Added to this is the fact that the current chief executive Jes Staley responded to a whistle-blower by attempting to unmask the person making the claim, thus breaking the most basic tenet of how to deal with such a situation.

The current state of play is summed up by this in the Financial Times.

Two years ago, Mr McFarlane set a target of doubling Barclays’ share price. But since then it has fallen by more than a quarter. The chairman has told colleagues he aims to stay at least until the shares regain their lost ground.

The words of Lawrence Oates seem both appropriate and inappropriate.

“I am just going outside and may be some time.”

As he faced troubles with courage and self-sacrifice we watch bankers facing trouble with denial and self-aggrandisement.

Comment

The bank bailouts were presented as saving the economy but as time has gone by we are increasingly faced with the issue that in many ways “the precious” has been prioritised over the rest of the economy. The claim of building trust in the system has had Fleetwood Mac on the sound system.

Tell me lies
Tell me sweet little lies
If I could turn the page
In time then I’d rearrange just a day or two
Close my, close my, close my eyes
But I couldn’t find a way
So I’ll settle for one day to believe in you
Tell me, tell me, tell me lies
Tell me lies

Now we find that there has been some progress ( Lloyds back in the private sector and some parts of Northern Rock and Bradford and Bingley sold) but also a long list of failures. How was nobody at the top responsible for some of the largest examples of fraud in human history? We are forever being told the world was “saved” but the reality was that it was what continue to look like zombie banks were saved at the cost of ossifying our economic system. To my mind it is one of the causes of our productivity problem.

It is clear to me that this industry has seen one of the clearest cases of regulatory capture that you could wish not to see.

 

 

 

 

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?

 

 

It is always the banks isn’t it?

Firstly as we arrive at what is now called  Christmas Eve Eve let me wish all of you a very Merry Christmas. As I will be on the lunchtime show on Share Radio next Thursday I will  post at the end of next week but will take a short break before then. Meanwhile financial markets have raised themselves from annual end of year torpor to review quite a bit of activity in the banking sector. You see governments and regulators invariably wait until this time of year to hand out presents to the banking sector although many of them are not the sort of present we dreamed of as children. In past years we have seen both bailouts and bail ins in Portugal and Italy for example and this year I have been expecting the final chapter of the Monte Paschi story to arrive about now for some time.

The collapse of Monte Paschi

This sad sorry saga is now coming to some sort of climax. Yesterday evening as City-AM reports the board of directors met and decided it was over.

The country’s third-largest bank said it failed to secure investors and sell new shares, so it scrapped a debt-to-equity conversion offer that had raised €2bn. It is returning bonds tendered under the swap.

Monte dei Paschi said it would not pay fees to investment banks that had worked to place its shares or on its planned bad loan sale, including its advisers JPMorgan and Mediobanca.

Investment bankers not be paid is that allowed these days? Anyway that moved us to a situation this morning as described below.

Trading in Monte dei Paschi shares, derivatives and bonds has been suspended today after confirming it has requested state aid from the Italian government.

Paolo Gentiloni, the new Italian prime minister, announced in the early hours of this morning that the country will dip into a €20bn (£16bn) fund to help the world’s oldest bank

The timescale being provided is a little bizarre however as the Bank of Italy should now move in and complete this over the holidays so that people know where they stand.

Local press has said the bailout plan could take two to three months, starting with a government guarantee of Monte dei Paschi’s own borrowings to ensure it doesn’t run out of cash.

The problem of course is balancing Euro area bail in rules with the fact that ordinary Italians bought and in some cases were miss sold the bonds of Monte dei Paschi which will be bailed in and the fact that the Italian taxpayer has to take on yet more debt. So whilst we can say “It’s Gone” we do not know exactly where. However we may find out later as Livesquawk points out.

Italian Government To Meet At 12:00 CET To Discuss Economy & Finance Decree.

Fines Fines Fines

The next section is brought to you with the question what did the US taxpayer do for revenue before they discovered fining foreign banks?

Barclays

There was a little more surprise when this appeared on the news wires yesterday evening. From the BBC.

The US Department of Justice said: “From 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme.”……

Federal prosecutors said that as part of the alleged scheme Barclays sold $31bn in securities.

More than half of the mortgages backing the securities defaulted, the suit alleged.

According to Barclays this is all “disconnected with the facts” which looks like an official denial to me and we know what to do with them.  This is a by now familiar tale where denial turns into how much? As I describe below.

Deutsche Bank and Credit Suisse

My old employer regularly features in the news and here it is as the US regulators hand it a grinch style Christmas present. From Sky News.

Deutsche Bank and Credit Suisse have agreed to pay $7.2bn (£5.9bn) and $5.3bn (£4.3bn) respectively in penalties relating to the collapse of the US housing market before the financial crisis.

The Swiss lender announced it had reached a deal with the US Department of Justice hours after a similar move by Deutsche.

So happy days for the US taxpayer and unhappy days for the shareholders of the two companies? Actually the share price of Deutsche Bank is up around 3% this morning at 18.27 Euros meaning this from Sky News must have been a miss read of expectations.

While the German bank’s sum is half the $14bn originally sought by investigators, it is more than $2bn above the amount analysts expected Europe’s third-largest bank to shell out.

It seems that it is Credit Suisse where expectations may not have been met as after an early rally the share price has drifted lower today. For a deeper perspective a pre credit crunch share price just under 90 has been replaced by one of 15.2. As for my old employer a sort of Christmas ghost puts a chill in the air as we note just under 99 Euros being replaced by 18.27.

How many extra nukes for the United States will these fines pay for?

Of Number Crunching and GDP

Let me open with some seasonal cheer for the UK providing by the Office for National Statistics this morning.

UK GDP in volume terms was estimated to have increased by 0.6% in Quarter 3 2016, revised up 0.1 percentage points from the second estimate of GDP published on 26 November 2016, due to upward revisions from the output of the business services and finance industries.

We cannot keep the banks out of the news but at least this time it is for something positive! However annual growth fell to 2.2% due to downwards revisions earlier in the year meaning that the post EU vote number was better than the average of the pre EU vote number leaving ever more egg on ever more establishment faces. I did ask about this on Twitter.

Is Professor Sir Charles Bean available to explain how his -0.1% to -1% GDP forecast turned out to be +0.6% please?

It would seem that our professorial knight is ideally equipped to continue the first rule of OBR ( Office of Budget Responsibility) club. Also the more wrong he is will he collect even more impressive sounding titles?

But there is something to provide humility to those who analyse the detail of economic numbers. From Howard Archer.

Welcome news as balance of payments deficit in 2015 revised down markedly to £80.2bn from £100.2bn;

Even in banking terms £20 billion is a tidy sum and a revision from back then gives us some perspective on this.

The trade balance deficit widened from £11.0 billion in Quarter 2 2016 to £16.7 billion in Quarter 3 2016 (Figure 9). The trade position reflects exports minus imports. Following a 1.4% increase in Quarter 2 2016, exports decreased by 2.6% in the latest quarter, while imports increased by 1.4% in Quarter 3 2016 following a 0.4% increase in Quarter 2 2016.

It would be more accurate to say we think we did worse in the quarter in question rather than being absolutely sure of it.

Comment

As I look back over not only this year but the preceding years of the credit crunch era I note how much of this is really a story about the banks and the banking industry. As we compare it to the real economy I feel that our establishment have misunderstood which is the tail and which is the dog. Even when we move to other stories such as UK GDP we see the banks at play again although in a rare occurence the mention is favourable.

The saddest part is that all of this was supposed to have been reformed well before now. I guess it is reflected by this from bitcoin price.

The average price of Bitcoin across all exchanges is 910.16 USD

 

 

 

 

Brexit poses yet more questions about the banks

There is much to consider in the changes and fallout after the UK voted to leave the European Union on Thursday. However there are international perspectives and one of the themes of this blog has been singing along to ABC this morning already.

Shoot that poison arrow though to my heart
Shoot that poison arrow

Yes the Italian banking sector which I warned about again only on Friday posting a chart from Sober Look showing the share price declines seen recently including 22% that day. So far this morning there has been a small rally so panic over? Well when you see why they have stabilised there is a clear issue. From Bloomberg.

The government is weighing measures that may add as much as 40 billion euros ($44 billion), said one person, asking not to be identified because the talks are private. Italy may support lenders by providing capital or pledging guarantees, said the person.

Well not that private! We are reminded one more time that official vessels are leaky ones. I also note the “pledging guarantees” which is usually a scheme to try to keep the money off-balance sheet and therefore out of the national finances. An obvious issue if you are a country with slow economic growth and a national debt of 132.7% of GDP (Gross Domestic Product) at the end of last year. Another issue here is the way that private losses ( the Italian banks have around 360 billion Euros of bad debts) look like they might be socialised and handed over to the Italian taxpayer. We have seen before that the estimates of such a move rise ever higher in what is presented as a “surprise”.

Regular readers will recall that I have long argued that Mario Draghi will use some of the ECB monetary easing to help the banks he used to supervise. Friday brought some news about this as Reuters reports.

Italy’s top thirteen banks took up over a quarter of the 399 billion euros ($442 billion) in super-cheap loans allotted by the European Central Bank in the initial round of Targeted Long-Term Financing Operations……….Net additional liquidity injected by the TLTRO on Friday was equal to 32 billion euros and Italian banks took up over half of it, or 16.25 billion euros.

As we look at such numbers we can look for comparison at the still relatively new bad bank called Atlante. It raised some 4.25 billion Euros of capital which looks rather thin compared to the challenges ahead to say the least. Also before all of this it was being asked for help again. From Bloomberg last week.

Veneto Banca SpA’s shareholders spurned its initial public offering, signaling that Italy’s new rescue fund will probably be called upon to assume control of a second lender.

Retail investors bought just 2.2 percent of 1 billion euros ($1.1 billion) in stock, the Montebelluna, Treviso-based lender said in a statement Thursday.

There was a chance that institutional investors would buy on Friday but of course in that days melee they would have regretted it if they had. I will move on but just point out that the situation is frenetic as share prices which were up are now down which frankly just like the rumour mill is a sign of what a mess this is.

Japan

The UK day opened with various statements from Japan. There were of course plenty of issues pre-existing there including the new stronger phase for the Yen with the Brexit result gave a push to. So far it has mostly been open mouth operations but one bit seems to be building in volume.

Japan Govt Mulls Boosting Stimulus Package To Over JPY 10 Tln — RTRS ( @livesquawk )

Oh and some are pressing for more monetary easing which of course has a credibility problem with the implication that the enormous amount provided so far was and is not enough. What we are seeing is how tightly strung the supposedly recovered world economy is.

Something extraordinary

This is something that like the 0% yield for the benchmark German 10 year bond yield has felt like it has been coming for a while.

UK 10-year yield drops below 1% for the first time ever ( @FerroTV )

If we move to longer dated yields we see that the 30 year yield is now 1.82%. Both of these are SIMPLY EXTRAORDINARY and the use of capitals is deliberate.  I can recall the benchmark UK Gilt yield which back then was between the two (15/20 years) being 15%. It reminds me of the discussion on the 10 th of June. I was writing about negative yielding bonds then but much of this applies to the very low yields the UK now has.

Negative yielding bonds provide quite a windfall for fiscal policy. There is a flow one which the media mostly ignores but there is the opportunity for a capital one should the 3 main beneficiaries use it. It is not quite a “free lunch” although it would be for a while a lunch that you were paid to eat. What I mean by that is that the national debts would rise and also the bonds would as a minimum have to be refinanced in the future and maybe in some sort of alternative universe – the sort of place where Spock in Star Trek has emotions – be actually repaid.

So thoughts?

Such yields will also spiral through the economic system so let us remind ourselves of two of the main consequences. Firstly there is the problem for the business model of pensions and longer-term contracts which has been oiled for years by positive interest-rates which have shrunk dramatically. On the other side there are mortgage-rates which have been falling and if this position is sustained look set to fall again.

Whilst Brexit has been the trigger here in the short-term it is also true that yields have been falling across much of the world for some time now. Indeed if you look at really long-term trends for around 30 years or so.

The banks

So often we find ourselves returning to the banks which we keep being told have recapitalised and are in central banker speech resilient. From Bank of England Governor Mark Carney on Friday.

These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.
The capital requirements of our largest banks are now ten times higher than before the crisis.
As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
Yet we find that each time there is financial market trouble they are at the forefront of it.

Overall I think that he did the right thing on Friday morning as a central banker should in response to a clear change in so many areas. However there is a sub-plot which is like with the Forward Guidance debacle where reality undermines bluster. From the Financial Times.

Shares in RBS and Barclays were briefly suspended this morning after falling more than 8%.

Ah yes the RBS which needs fixing every year and has been about to turn a corner for at least 6 years now. But as we look around the financial world we see so many names familiar to my analysis on here. Let us pick one which is down 7% today.

Deutsche Bank shares are down 57% over 12 months. ( h/t Patrick McGee )

This reinforces this from Friday.

Charlie Bilello, CMT ‏@MktOutperform Jun 25
Deutsche Bank ADR, Friday
1) All-Time Low
2) 88% below ’07 peak
3) 2nd highest volume
4) Worst decline since Jan ’09

As Taylor Swift would put it.

I knew you were trouble when you walked in

But here is another factor which is that Deutsche Bank expects that it will always be bailed out by Germany. So there is a sort of stop-loss for it but of course there are all sort of problems as I was reminded earlier.

EU’s Bank Recovery & Resolution Directive – outlaws further state-funded bailouts of failing banks Ref p514 ( h/t Mervyn Randall )

Rock meet hard place.

Comment

There is so much at play and as ever let me avoid any specific politics. However the UK political establishment has managed to under-perform even my very low expectations. Of course they are intertwined these days with the banks and the bailouts and I would point out again how fragile the confidence is in the banking system that we keep being told is fixed or rather “resilient”. But take care as the central bankers have backed the banks at every turn so far and I cannot help thinking of the “no limits” phrase of Mario Draghi.

Also I have seen market panics before like for example as a young man when the UK left the ERM and one thing I do know is that proclamations of certainty about the future are often out of date that week if not day.  I also know that it will not stop people from making them. Just like markets so often re-test their lows.

 

The fall and rise of the 100% mortgage in the UK

One of the features of the credit crunch era has been the way that the various establishments make all sorts of promises along the lines of “never again” and then after a delay return to past behaviour. A type of reversion to mean if you like. If we look back to the pre credit crunch era then the peak of if you prefer nadir for one type of behaviour was the 125% mortgages under the Together banner issued by Northern Rock and yes you could borrow 25% more than the value of the property the mortgage was secured on. What could go wrong? Sadly many borrowers found out.

Actually this was not the only problem with Together mortgages as this from the bad bank NRAM which holds them now shows.

For example, a Together customer with a mortgage of £100,000, a loan of £15,000 (both still with NRAM) and a current interest rate of 4.79% with 15 years term remaining would be paying £60 per month on just their £15,000 loan.

Yes they involved an unsecured loan which has mostly got forgotten over time but this added to the debt burden by being over the mortgage term rather than say the 5 years or so of a loan. The advertisers call this helping with monthly payments, but look what it does to the total debt. This is illustrated by taking a loan at a higher interest-rate but crucially for a shorter period.

Switching the £15,000 loan to a 5 year deal elsewhere with an interest rate of 5.99% would mean a new repayment of £290 per month, which does sound like a big increase.

But the loan would be paid off a whole 10 years sooner, saving a whole £16,394 in interest payments.

The return of a 100% mortgage

You might think that such a thing was not possible as back in the day there was a queue of politicians telling us that such things were a sign of irresponsibility in the system. From the Guardian in 2009 from the Liberal Democrats Treasury Spokesman.

In the current housing market, with prices falling steadily, the 100% mortgage is an insane risk for any lender……most people would surely accept that we need to restore greater responsibility to money lending.

From the BBC on the 22nd of February 2009 and the emphasis is theirs.

Banking minister Lord Myners has said banks were “foolish” to offer 100% mortgages, after Gordon Brown called for “prudent and careful” lending.

Lord Myners said costly lessons had been learned worldwide “about reckless, feckless, witless lending”.

Here was the conservative party spokesman.

Shadow treasury chief secretary Philip Hammond accused the prime minister of “trying to shut the stable door on irresponsible lending long after the horse has bolted”.

Some of you are probably already singing along with Carly Simon.

But if you’re willin’ to play the game
It’s comin’ around again

Barclays Family Springboard

Let us examine the details and here is the opening pitch.

Apply for a Family Springboard mortgage of up to £500,000 on a property in the UK, without a borrower deposit.

The details remain in a world where a 5% deposit was required but the Press Association is more up to date.

Customers with an income of more than £50,000 will be able to borrow up to 5.5 times their income, up from a maximum multiple of 4.4.

I suppose that would have to raise this amount for the thing to work and the interest-rate is show below.

A buyer without a deposit could get a three-year fixed rate of 2.99% under the family springboard mortgage

Seems very cheap for a 100% mortgage does it not? But of course most interest-rate rates seem like that these days.

Bank of Mum and Dad

These are required here but only for three years and the deal is sweetened for them as shown below.

They open a Helpful Start Account with 10% of your purchase price at the same time you apply….They get their savings back after 3 years with interest, as long as you keep up the repayments.

If we start with their position they will get an interest rate of 1.5% over Bank Rate so 2% currently which is pretty good considering. Crucially they are only backing the payments for the first three years and then get their money back plus interest. Their intervention leaves us with a curious somewhat bi-polar situation where the borrower gets a 100% mortgage but the bank would argue that it only has the risk of one of more like 92% if we allow for the fact that it will have reduced during these three years. Of course we are then left with the issue of whether 92% is too high at this level of house prices.

We know that the Bank of Mum and Dad or BOMAD is rather busy these days.

Analysis by Cebr for Legal & General shows that, as of 2016, a quarter (25%) of all homeowners received help when they bought the home they live in.

Indeed the numbers below are rather eye-catching.

Based on the figures and home purchase prices, we estimate that, in total, family and friends will spend £5bn in 2016 to help support the purchase of £77bn worth of property. This puts the Bank of Mum and Dad in the top ten mortgage lenders in the UK.

There are quite a few issues here and the most obvious is this one.

The Bank of Mum and Dad is not adequate in that it fails to address the needs of those without parental wealth,

To Infinity and Beyond

Well for many of us anyway as we note this development from last month. From Hodge Lifetime.

The 55+ Mortgage is an interest-only mortgage available to borrowers aged 55 or above…….The maximum term we allow is up to when the youngest borrower reaches age 95.

Youngest borrower reaches 95? That pretty much covers everyone does this not? It also sets us further down the road which Japan travelled as it headed towards what are called intergenerational mortgages. A little care is needed as the old limits at 65 are out of date with flexible retirement terms and increasing life spans but it is hard to have any support for a mortgage which is interest-only and goes to 95. What court would enforce terms on a 95 year old……

The Bank of England

The Financial Policy Committee wants us to think this.

the FPC remains vigilant to risks in this area.

Meanwhile it peruses the Bank of England tea trolley to see what cakes are on it and dreams of the menu for luncheon.

Comment

There is much to consider here and it is typical of the times that we have a mortgage which is in one sense a 100% one as in from the borrower’s point of view whereas from the bank’s point of view it is more like a 92% one. Also on the 10% BOMAD “Helpful Start” it makes a turn by paying 2% to them but charging 2.99% on the mortgage. I also note that the mortgage borrower will be paying interest on the amortised value of the full loan rather than 90% so over time that will be expensive.

Everybody is happy? Well if house prices have gone up yes and not to bad if they have stayed the same but difficult if they have fallen. On that front I have some worrying news for you provided by Legal and General.

Of 88 economists questioned by the Financial Times to assess the impact of government policies, none expected a general fall in prices.

Oh and of course all this is happening at a much higher level of house prices compared to earnings than before.

 

 

 

 

 

Shouldn’t our banks be helping the economic recovery and not hindering it?

The last 8 years or so have seen the development of the symbiotic nature of the relationship between governments and banks. Much of this has come about by the way that central banks have set monetary policy to help banks more than the real economy. We may have seen an example of that this week from the Bank of Japan which is worried about the impact of a -0.1% interest-rate on the Japanese banks and so decided to not ease again. There we have a problem as of course they have never really recovered in the lost decade period. Another version of the symbiotic relationship is the amount of sovereign or national debt banks hold especially in the Euro area. What could go wrong with giving sovereign bonds a zero risk rating? You will not be surprised to see who is leading this particular pack. From Bloomberg.

In Europe, the issue is particularly important in Italy, where domestic state debt accounts for 10.5 percent of banks’ total assets, well above the euro-area average of 4.2 percent.

Royal Bank of Scotland

Another example of the symbiotic relationship between governments and banks has been demonstrated this morning in the interim statement by Royal Bank of Scotland or RBS.

An attributable loss of £968 million included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the UK Government.

So we see that RBS has done its best to help bail out the UK Public Finances as Chancellor Osborne finds himself able to trouser nearly £1.2 billion of extra revenue. he is probably singing Dionne Warwick.

That’s what friends are for
For good times and bad times
I’ll be on your side forever more
That’s what friends are for

Of course the UK taxpayer bailed out RBS in 2008 and ended up owning 78.3% of RBS. They were let down then because for that money they could have insisted on 100% ownership but the establishment preferred to be able to claim that the bank had not been nationalised. More recently some of the shareholding has been sold but for a loss. Currently the share price is at 243 pence compared to the 407 pence that the government claims is a break-even level. So RBS got a bailout and this year the figures of Chancellor Osborne have got one. But the taxpayer seems to be staring at losses which of course are the opposite of the profit promised back in the day. From the then Chancellor Alistair Darling.

The taxpayer, therefore, will be fully rewarded for that investment………ensuring that the taxpayer is appropriately rewarded…….

In the same statement “fully” had morphed into “appropriately” and it has been on that declining journey ever since.

The Outlook

The official view on RBS ever since this has been on the lines of the outlook is bright. If anyone has actually believe that then they must by now have been very disappointed as bad news has followed bad news! These days banks produce a litany of different profit figures an issue I raised earlier on Morning Money on Share Radio but the sentence below sums the state of play up best I think.

Adjusted operating profit(4) of £440 million in Q1 2016 was down from £1,355 million in Q1 2015 primarily due to Capital Resolution and the IFRS volatility charge.

You might reasonably think that as we are three years into a boom that banks would be doing well especially as that boom has centred on boosting mortgage lending and house prices. Indeed one might reasonably expect the numbers below to be up rather than down.

UK Personal & Business Banking (UK PBB) adjusted operating profit of £531 million was £54 million, or 9%, lower than in Q1 2015.

Still one area is booming.

Buy-to-let new mortgage lending was £1.5 billion compared with £0.8 billion in Q1 2015

If we look at the impact of RBS on the UK economy we open in troubled fashion as we note the growth of buy-to-let. But surely after all the help its has received and the UK economic recovery RBS is fit to help us back? Well not by boosting employment.

RBS remains on track to achieve an £800 million cost reduction in 2016 after achieving a £189 million reduction in the first quarter.

And this.

Capital Resolution remains on track to reduce RWAs to around £30 billion by the end of 2016 following a £1.4 billion reduction in Q1 2016.

All these years later we have job losses and deleveraging as opposed to the brave new world promised. Oh and there continues to be something of a sword of damocles hanging over it as this tweet sent to me earlier indicates.

I’m optimistic about Today we launch our action against them 4 funding/counsel in place ( @efgbricklayer )

RBS has remained what we might call accident prone as it was caught up in the Panama Papers problem and this morning this emerged as well. From the Guardian.

RBS said the Swiss regulator, the Swiss Financial Market Supervisory Authority, had “opened enforcement proceedings against Coutts & Co Ltd (Coutts), a member of the RBS Group incorporated in Switzerland, with regard to certain client accounts held with Coutts”.

It feels like a bottomless pit does it not?

Monetary data should be good for banks

Our Martian economist might reasonably expect it to be boom time as he/she peruses this morning’s data release from the Bank of England. Let us start with mortgage lending.

Lending secured on dwellings increased by £7.4 billion in March, compared to the average of £3.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 4.7% and 3.4% respectively.

Quite a surge as we presumably see the impact of the higher Stamp Duty charge on Buy To Let purchases which is now in place but was not then. But if you really want to see numbers which are motoring take a look at this.

Consumer credit increased by £1.9 billion in March, compared to the average of £1.4 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.6% and 9.7% respectively.

If our banks cannot make money out of this when can they? That is a little ominous as we note lower mortgage approvals on the month as the Buy To Let surge fades away.

Barclays

It too seems to be failing to do its bit for the UK economy. From Bloomberg.

Following these disposals, which include the sell-down of its 62 percent stake in Barclays Africa Group, McFarlane said the bank expected group full-time employees to reduce by around 50,000 people, resulting in a total headcount of 80,000 – almost half the staff employed at its peak.

Oh and this bit could have come straight out of an episode of Yes Prime Minister.

McFarlane said he had “a lot of sympathy” with the issue of high levels of banker compensation but that Barclays was not among the highest payers in the industry and the payouts were necessary to retain top staff.

Comment

Back in 2009 the then Chancellor Alistair Darling was reported in Hansard as saying this.

They will mean strong and safer banks that are better able to support the recovery,

Actually the story of the credit crunch was that we continued to support the banks via less explicit moves that were still bailouts. For example Quantitative Easing offered them profits on government bonds and similar assets. Then the summer of 2012 saw the Funding for Lending Scheme which gave quite a subsidy to both their mortgage books and mortgage lending. So the theme of us helping them continued rather than us getting much back.

Also I note that back in 2008/09 many of the moves were badged as being to help UK businesses via bank lending. So if we add in the FLS above it should be booming right? I will let readers make up their own minds after perusing this morning’s numbers.

Net lending – defined as gross lending less repayments – to large businesses was -£1.9 billion in March. Net lending to SMEs was £0.1 billion.

We appear to have copied Japan and our version of kicking the can has left us with a banking sector which the Cranberries provide a theme song to.

Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head
Zombie, zombie, zombie

Some of course seem to be even worse off. From the Financial Times

Contributions to Italy’s bank rescue fund undershoot

On The Radio