The ECB starts to face up to some of the problems of the Euro area banks

Today has brought the Euro area financial sector and banks in particular into focus as the ECB ( European Central Bank ) issues its latest financial stability report. More than a decade after the credit crunch hit one might reasonably think that this should be a story of success but it is not like that. Because the ECB is rather unlikely to put it like this a major problem is that the medicine to fix the banks ( lower interest-rates) turned out to be harmful to them if you not only continued but increased the dose. Or as Britney Spears would put it, the impact of negative interest-rates on banks is.

I’m addicted to you
Don’t you know that you’re toxic?
And I love what you do
Don’t you know that you’re toxic?

Actually the FSR starts with another confession of trouble as it reviews the Euro area economy.

The euro area economic outlook has deteriorated, with growth expected to remain subdued for longer. Mirroring global growth patterns, information since the previous FSR indicates a more protracted weakness of the euro area economy, leading to a downward revision of real GDP growth forecasts for 2020-21.

There is the by traditional element of blaming Johnny Foreigner which has some credibility with the trade war issue. However if we look deeper we were reminded only yesterday about the told of the Euro area in its genesis.

In September 2019 the current account of the euro area recorded a surplus of €28 billion, compared with a surplus of €29 billion in August 2019. In the 12-month period to September 2019, the current account recorded a surplus of €321 billion (2.7% of euro area GDP), compared with a surplus of €378 billion (3.3% of euro area GDP) in the 12 months to September 2018.

It sometimes gets forgotten now that one of the factors in the build-up to the credit crunch was the Euro area ( essentially German ) trade surplus.

However the essential message here is that lower economic growth is providing a challenge to the Euro area financial sector and banks and tucked away at the bottom of this section is one of the reasons why.

At the same time, inflationary pressures in the euro area are forecast to remain muted over the next two years, translating into overall weaker nominal growth prospects.

Paying down debt can be achieved via inflation as well as real economic growth and is one of the reasons why the ECB keeps implementing policies to get inflation up towards its 2% per annum target. A sort of stealth tax.

Bond Markets

There is a warning here.

Asset valuations, reliant on low interest rates, could face future corrections.

If we start with sovereign bonds then there is am implied danger for Germany as it has the largest sector with negative yields. But if we switch to banking exposure then eyes turn to Italy because not only does it have a large relative national debt but its banks hold a relatively large proportion of it at 20%. They will have done rather well out of the ten-year yield falling by over 2% to 1.3% over the past year but is that the only way Italian banks make money these days? There is a reflection of this sort of thing below.

Very low interest rates, coupled with the large number of investors which have gradually increased the duration of their fixed income portfolios, could exacerbate potential losses if an abrupt repricing were to materialise in the medium-to-long run.

Tucked away is an arrow fired at Germany.

there is a strong case for governments with fiscal space to act in an effective and timely manner.

What about the banks?

Here we go.

Bank profitability concerns remain prominent. Bank profitability prospects have weakened against the backdrop of the deteriorating growth outlook  and the low interest rate environment, especially for banks also facing structural cost and income challenges (see Special Feature A).

Nobody seems to want to back them with their money.

Reflecting these concerns, euro area banks’ market valuations remain depressed with an average price-to-book ratio of around 0.6.

Although the ECB would not put it like this if this was a rock concert the headliner would be my old employer Deutsche Bank. It has a share price of 6.5 Euros which certainly must depress long-term shareholders who have consistently lost money. There have been rallies in this example of a bear market and well played if you have taken advantage but each time they have been followed by Alicia Keys on the stereo.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
I keep

This bit is both true and simply breathtaking!

Banks have made slow progress in addressing structural challenges to profitability.

If you have policies which are fertiliser for zombie banks then complaining about a march of the zombies is a bit much. In this area it is Halloween every day.

If you are wondering about Special Feature A so was I.

These banks all stand out in terms of elevated cost-to-income ratios. But there also appear to be three distinct groups: (i) banks struggling with legacy asset problems; (ii) banks with weak income-generation capacity; and (iii) banks suffering from a combination of cost and revenue-side problems.

We are told this is only for a “sub set” but point (iii) is plainly a generic issue in the Euro area banking sector. The proposed solution looks not a little desperate.

But in systems with many weak-performing small banks, consolidation within their domestic system could improve performance. Finally, a combination of bank-level restructuring and cross-border M&A activity could help reduce the costs and diversify the revenues of large banks that are performing poorly.

Consolidating the cajas in Spain and some of the smaller banks in Italy did reduce the number of banks in trouble but did not change the problem.There is a bit of shuffling deckchairs on the Titanic about this which turns to laughter as I consider “cross-border M&A activity”. Like RBS in the UK? That was one of the ways we got into this mess. One of the problems with banking right now is what do they diversify into?

On aggregate, euro area banks’ return on equity is expected to remain low, limiting the sector’s ability to increase resilience through retained earnings

Er well yes.

Should this all go wrong we will be told we were warned.

A banking system operating with significant overcapacity is also vulnerable to weak competitors driving down lending standards and an underpricing of risk.

Shadow Banking?

Some of the role of banks has moved elsewhere and of course there are plenty of issues for long-term savings in a negative interest-rate world.

After a slight decline in the last quarter of 2018, the total assets of investment funds (IFs), money market funds (MMFs), financial vehicle corporations, insurance corporations (ICs), pension funds (PFs) and other financial institutions gradually increased to almost €46 trillion in June 2019, and represented 56% of total financial sector assets.

Also what do you expect if you drive some corporate bond yields negative by buying so many of them?

But more recently, the low cost of market-based debt has supported a further increase in NFCs’ debt issuance – particularly of investment-grade bonds.

Can anybody remember a time when relying on bond ratings went wrong?

Negative interest-rates again.

As yields have fallen, non-bank financial intermediaries hold a growing share of low-yielding bonds, which decreases their investment income in the medium term and encourages risk-taking.


The press release is if we read between the lines quite damning.

Low interest rates support economic activity, but there can be side effects

Signs of excessive risk-taking in some sectors require monitoring and targeted macroprudential action in some countries

Banks have further increased resilience, but have made limited progress in improving profitability.

It is welcome that we are seeing some confession of central banking sins but it comes with something else I have noticed recently which is that ECB related accounts are taking the battle to social media.

Dear fellow German economists, if you are wondering what you can do for Europe: Please help to dispel the harmful & wrong narratives about the @ecb  ‘s monetary policy, floating around in political and media circles. These threaten the euro more than many other things.

That is from Isabel Schnabel who is the German government and Eurogroup approved candidate to be a new member on the ECB board. From the replies it is not going down too well but we can see clearly why she was appointed at least.

Me on The Investing Channel

Will this be the final easing countdown for Europe and the ECB?

We find ourselves in the economic equivalent of the Phoney War period of the Second World War as we wait for tomorrow’s policy announcement from the European Central Bank. But it is also a period where events are moving quite quickly. Here is the IMF from yesterday.

In our July update of the World Economic Outlook we are revising downward our projection for global growth to 3.2 percent in 2019 and 3.5 percent in 2020. While this is a modest revision of 0.1 percentage points for both years relative to our projections in April, it comes on top of previous significant downward revisions.

It is not the numbers that bother me as the IMF is far from the best forecaster but the direction of travel where it has found itself revising the outlook downwards. Also there was a curious additional part to this IMF output as the quite below shows.

Financial conditions in the United States and the euro area have further eased, as the US Federal Reserve and the European Central Bank adopted a more accommodative monetary policy stance.

I think they mean are expected to do so. Ironically this came with rumours that the ECB will not act tomorrow and will instead guide us to what it will do in September.

Business Surveys

After this mornings Purchasing Managers Indices the ECB view will be more like definitely maybe on a delay. It was only yesterday that I was pointing out that France had been doing better than its peers.

Modest growth was driven by the service sector,
which posted an expansion in business activity for
the fourth month in a row. However, the rate of
increase decelerated from June and was moderate
overall. Meanwhile, manufacturing output slipped
back into contraction territory, following a first rise for
four months in June. That said, the decline was only

So according to this survey the rate of growth is slowing in France and you will not be surprised to see what is the driving force of this.

New export business was broadly stagnant at the
start of the third quarter, with a contraction in
international sales at manufacturers broadly
offsetting a modest rise at services firms.

A few minutes later the news from Germany was also downbeat.

The health of German manufacturing went from
bad to worse in July, according to the flash PMI
data, raising the risk of the euro area’s largest
member state entering a mild technical recession.
“The performance from Germany’s goods
producers in July is the worst recorded by the
survey in seven years, with the renewed weakness
mainly stemming from an accelerated drop in
export orders – the most marked seen in over a

We have got used to weak readings for this sector in 2019 but the 43.1 for July so far was the weakest we have seen. The services sector is doing better but even it is now slowing.

Still solid growth in the service sector means that
the German economy is just about keeping its head
above water for now, but even here there are signs
of increased worries among companies as
optimism hit a three-and-a-half year low

If we sweep all that up and look at the total Euro area we were told this.

The eurozone economy relapsed in July, with the
PMI giving up the gains seen in May and June to
signal one of the weakest expansions seen over the
past six years. The pace of GDP growth looks set
to weaken from the 0.2% rate indicated for the
second quarter closer to 0.1% in the third quarter.

That will get the attention of the ECB. We know that these PMI surveys are far from always correct but central bankers like them and the ECB will be very concerned about the Euro economy continuing to slow. It will not agree with it all as we know the German Bundesbank thinks that the German economy contracted in the second quarter whereas Markit is more positive. But that means it starts from a weaker position.

Money Supply

The opening salvo here did buck the bad news trend.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.2% in June, unchanged from previous month.

That is better than the 6.2% with which 2019 opened and gave us another hint that it was going to be a rough first half to 2019 for the Euro area. The situation has improved in monetary terms but that has collided with the trade war.

However the wider measure was not good.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.5% in June 2019 from 4.8% in May, averaging 4.7% in the three months up to June.

If we break it down we see this.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.8 percentage points (as in the previous month),

So the slowing was in the bread money components represented by M2 and M3. Also if we look at the other components some of this is coming externally.

net external assets contributed 2.4 percentage points (as in the previous month)

I am always cautious about over analysing the components as I have seen that go very wrong in the past but it would be preferable if the growth was domestic. Especially as the ECB bank survey released yesterday suggested that credit was becoming harder to find.

According to the July 2019 bank lending survey, credit standards tightened in the second quarter of 2019 for loans to enterprises, marking the end of the net easing
period started in 2014, as concerns about the economic outlook and increased risk aversion translated into tighter internal guidelines and loan approval criteria despite
favourable funding conditions. Credit standards also tightened for consumer credit, in line with developments in the previous quarter…..



The situation here comes out of the deepest fears of the ECB. What I mean by that is that we have not yet had 7 full months from when the last easing programme ended. Firstly that poses deep question such as what good did it do and why can’t the Euro area grow without stimulus? But in terms of the ECB meeting and policy they are likely to be ignored. Instead it will focus on factors such as its own claim ( Mario Draghi) that the QE programme and a -0.4% deposit rate contributed 1.5% of GDP growth to the Euro area.

Also any proper credit flow relies on the banks and they continue to look thoroughly zombified. From CNBC.

German lender Deutsche Bank reported a weaker-than-expected net loss of 3.15 billion euros ($3.51 billion) for the second quarter of 2019.

Analysts polled by research firm Refinitiv had estimated a net loss of 1.7 billion euros for the period, due to the bank’s massive restructuring program announced earlier this month. The German bank itself had previously said it expected to report a net loss of 2.8 billion euros for the quarter.

The share price has fallen 4% this morning and back below 7 Euros in response to the news that things are even worse than we were told earlier this month. Next via Reuters there was this.

Italy’s biggest bank by assets UniCredit (CRDI.MI) is considering cutting around 10,000 jobs, or 10% of its global workforce, as part of a new business plan to be unveiled in December, two sources close to the matter said on Monday.

It is not my purpose today to look at those two banks individually but more to use them of examples of a banking system that is troubled if not broken. If we switch to Spain which has been the best performing of the main Euro area economies in the Euro boom I note that many of its banks have share prices hitting new lows.

Thus after all tomorrow for the ECB may yet sing along to this from Europe.

The final countdown
It’s the final countdown
The final countdown
The final countdown (final countdown)
Ohhh. It’s the final countdown



The Deutsche Bank crisis of 2019 is about ten years too late

Over the weekend there was a flurry of news from my old employer Deutsche Bank. We knew that something was afoot and investigated the situation on the 17th of June.

Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking.The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk.

On Sunday we discovered that there has been some number-crunching in the mean time and that there had been quite a bit of inflation. From the Financial Times.

Deutsche Bank has unveiled one of the most radical banking overhauls since the financial crisis, closing swaths of its trading unit, cutting 18,000 jobs and hiving off €74bn of assets as it calls time on its 20-year attempt to break into the top ranks of Wall Street.

So the bad bank will be nearly 50% larger as we wonder if we are being told the amount they think they can get away with rather than the amount required. One piece of comfort although it will of course be cold comfort for those who will now lose their job is that the number of losses had been estimated at 20,000. Also conveniently from a German perspective many of the job losses will be abroad in London and New York.

The axe will fall hardest on the investment bank, where the balance sheet allocated to trading will be slashed by 40 per cent.

I have long thought that Brexit would be used as cover for this but I guess as it has dragged on Deutsche Bank decided it could not wait.


There will be quite a pivot in business strategy according to the FT.

The struggling German lender confirmed it would close down its lossmaking equities trading business and shrink its bond and rates trading operations in a long-awaited announcement on Sunday afternoon. The axe will fall hardest on the investment bank, where the balance sheet allocated to trading will be slashed by 40 per cent. Job cuts will start first thing on Monday morning in London and New York, and three top executives have been replaced.

Actually the FT forgot about the office in Tokyo where I once worked as my thoughts go to the Sanno Park Tower as it will have opened first.

Also we can look at the impact of the latest plan for the bad bank.

Deutsche will create new bad bank — dubbed a “capital release unit” — comprising €74bn of risk-weighted assets, equivalent to €288bn of leverage exposure on the balance sheet. The lender expects asset disposals will allow it to return €5bn to shareholders either via special dividends or share buybacks from 2022.

If we start with the way that the balance sheet exposure is much higher than the asset size this points to the bad bank finding it will not be short of financial derivatives. The actual impact if this is hard to say without knowing what they are. There have been plenty of numbers circulating about the derivative exposure of Deutsche Bank going as high as 74 Trillion. But the real issue is what is the risk from that? Many of the longer-term derivatives are not especially dangerous but in the new era are not especially profitable either. This is a fundamental issue as we find ourselves reminded that this should have been done at the beginning of this decade rather than now.

There is a price to be paid for all of this.

Around €3bn of upfront restructuring costs will push the bank into a second-quarter net loss of €2.8bn, with the total bill expected to hit €7.4bn by 2022.

More troubling perhaps is this bit.

Managers will target €6bn of cost cuts over the next three years to reduce annual expenses to €17bn. After the overhaul is complete the bank will be left with around 74,000 employees, down from 91,500 currently.

Up until now Deutsche Bank has not been that successful at cost-cutting or to be it another way if it had been able to do so we would not be where we are now.

Share Price

This rallied initially this morning as long-suffering shareholders got some concrete news. The share price rallied to 7.5 Euros but then went to down on the day and is pretty much unchanged on the day at 7.2 Euros as I type this. So the news overall has brought a bounce as we note that the share price had fallen below 6 Euros although as I pointed out on the 17th of June it is all relative.

Back at the peak the share price was more like 94 Euros according to my monthly chart. From a shareholder point of view there has also been the pain of various rights issues to bolster the financial position. These tell their own story as the sale of 359.8 million shares raised 8.5 billion Euros  in 2014 whereas three years later the sale of 687.5 million was required to raise 8 billion Euros. The price was in the former 22.5 Euros and in the latter 11.65 Euros.

The FT has also crunched some numbers.

of scant comfort to investors who have sunk €30bn into the bank over the past decade only to see its share price plunge.

There will not be any dividends for the next couple of years either.

Some Gallows Humour

From Reuters on the 27th of June.

Deutsche Bank AG on Thursday passed an annual health check by the Federal Reserve, clearing a second hurdle at a critical time for the German lender in tests administered by the U.S. central bank that measure banks’ ability to weather a major economic downturn.

However, the Federal Reserve placed conditions on Credit Suisse’s U.S. operations after finding weaknesses in its capital planning processes.


If we stay with Reuters then the next bit lasted for all of a fortnight.

The results provide a boost to the Wall Street operations of Deutsche Bank, Germany’s largest lender, which have been plagued by litigation, underperformance and regulatory investigations.

If we step back for some perspective there are two main factors here I think. The first comes with a heavy dose of irony as the central banking efforts to help and subsidise the banking sector or what they consider as “the precious” have crippled it. The second is that Deutsche Bank has taken so long to face up to its problems properly, after all the credit crunch was more than a decade ago now.

The banking sector was given various heroin style hits by the interest-rate cuts, then QE and then by credit easing. In the Euro area there were more hits as the deposit rate went into negative territory. But the main side-effect for the banks was that their business model began to disappear. The simplest version on this was paying depositors less than the official interest-rate which had long given them their own version of seigniorage. As they fear dropping most deposits below 0% they instead make a loss on this. Also they end up paying money to the central bank of which there is an example below from the Swiss National Bank.

Income from negative interest remained unchanged year-on-year at CHF 2.0 billion.

Banks can still make money out of fees and lending but they need to offset problems elsewhere these days. Perhaps that is why the Swiss National Bank decided this about its equity investments.

The SNB does not invest in the shares
of any systemically important banks worldwide nor does it invest in the shares of any mid-cap and large-cap banks or bank-like institutions from advanced economies;

The next issue is one of timing where Deutsche Bank has been allowed to roll on in some ways just as before. My own country the UK has not been perfect by any means as for example Royal Bank of Scotland was bailed out and at current prices it is only worth about half what was paid. But there was at least some change whereas Deutsche Bank has continued hoping to be the last (wo)man standing. Sadly for those losing their jobs this is now over. However as ever those responsible for this have been well paid and in some cases continue to be so. In the credit crunch era accountability is only for the like of us not for them.

Upside down
Boy, you turn me
Inside out
And round and round
Upside down
Boy, you turn me
Inside out
And round and round ( Diana Ross )

Weekly Podcast



What to do with a problem like Deutsche Bank?

By definition a credit crunch involves what Taylor Swift would call “trouble,trouble,trouble” for the banking sector in general and some banks in particular. A feature of the 2007/08 one is that we find that what we might call the bad smell emanating from the banking sector has never really cleared. This is especially true in Europe as Wolf Street pointed out on Friday.

European bank shares – which have been getting crushed and re-crushed for 12 years – are getting re-crushed again. On Friday, the Stoxx 600 Banks index, which covers major European banks, including our hero Deutsche Bank, dropped to an intraday low of 130.5 and closed at 131.2, thereby revisiting the dismal depth of December 24, 2018 (130.8).


European banks did not soar on the first trading day after Christmas, unlike other stocks. Instead they fell further and hit their multi-year low on December 27 (129). The index is down 21.5% from a year ago and 33% from January 2018:

From the point of view of a Martian observing events this would provoke some head scratching, after all there have been reports of recovery for years. He or she would soon note that there is something else going on as the Financial Times points out.

Almost $12tn in bonds trading with sub-zero yield

This poses a problem for banks who essentially live off there being positive interest-rates, as otherwise there is the alternative of cash which suddenly looks rather attractive with its yield of 0%. Anyway our Martian is bright enough to know that it isn’t really necessary to worry too much about the maths as long ago those on Mars learnt that one of the best guides to human behaviour was to head in the opposite direction when we release official denials.

Deutsche Bank

Germany’s premier bank has found itself in the cross hairs of this issue and its travails have become quite a long-running saga. One way of looking at this comes from when we looked at it back on the 29th of August last year.

Back at the peak the share price was more like 94 Euros according to my monthly chart. From a shareholder point of view there has also been the pain of various rights issues to bolster the financial position. These tell their own story as the sale of 359.8 million shares raised 8.5 billion Euros  in 2014 whereas three years later the sale of 687.5 million was required to raise 8 billion Euros. The price was in the former 22.5 Euros and in the latter 11.65 Euros.

As you can see one of the most successful trades of the last decade is selling Deutsche Bank shares, especially if you do so in the face of the periodic rallies. So well done to anyone who has. The main danger is that you get called an “evil (usually foreign) speculator by the establishment. Putting it another way this has been the mother of bear markets, Another perspective is pointed out by the fact that Deutsche Bank had a dividend of 4.5 Euros pre credit crunch whereas this month the share price fall below 6 Euros.

Merger Mania

Regular readers will be aware of the phase where the apparent plan was to merge with Commerzbank. The catch was that really the only benefit from this would be to muddy the accounts for a year or two. Whereas on the other side of the coin a bank to big to fail (TBTF) would hardly be improved by making it even bigger! In spite of that there were several goes at this but eventually the plan folded like a deck chair.

A New Hope?

Last night the Financial Times published this story.

Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking.The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk.

I can see three initial issues with this.

1 Bad banks are so 2010 and it is now 2019

2.In itself a Bad bank does not solve anything as it is just an accounting exercise. What is needed is a behavioural change. Otherwise the shareholder liability does not change one iota.

3. If those “assets” could be sold as ” valued by the German lender in its accounts” then this would have happened many years ago!

Or as Earth,Wind and Fire put it.

Take a ride in the sky, on our ship fantasii
All your dreams will come true, right away

There is something which leaps of the page at me so here it is.

While the derivatives destined for the non-core unit still provide some cash flow, all the profit on the deals — and therefore the associated bonuses for those who arranged them — were booked up-front.

What could go wrong? Well Enron style accountancy results in another Enron. Or in the UK there was the case of Atlantic Computers some years back which booked profits up front and kicked liabilities forwards in time. So the lesson of not taking profits up front had been learnt but there is a catch. as Enron and Atlantic Computers collapsed but this does not happen to TBTF banks. So those managers who took the bonuses up front have done something which I would make subject to the law of fraud. For them it was something of a perfect crime as years later they have got away with it and we are being told the assets are fine.

Or maybe they are not quite so fine.

In the years since the instruments were first arranged, they have become a major drag on the bank’s capital because of their more stringent treatment under new regulations introduced after the financial crisis, said the people briefed on the plan.

There is an obvious contradiction here as if you sell these assets to someone they too will get “more stringent treatment under new regulations ” and thus will reduce the price, but I guess they are hoping we will not spot that.

Seldom does something in the financial press make me laugh out loud but this did.

The German bank believes it can divest the assets without taking large hits to its profit or capital because the long-dated interest rate derivatives are not toxic and have a predefined run-off plan, one of the people said.

If that were true they would have done it many years ago.

Also this feels like they are seeing if they can find a minimum they can get away with rather than really fixing the hole.

The final scale of the non-core unit has not been decided and the number “continues to oscillate”, but executives are discussing at least €30bn of risk-weighted assets with an eventual size of €40bn to €50bn most likely, two of the people said.


What this how procedure ignores is the rather devastating critique of the credit crunch provided by South Park with an episode based on the three simple words below.

And it’s gone

Whereas Deutsche Bank has been in denial ever since. This has created three main problems.The first is that those who have taken bonuses from the past deals have in my opinion got away with something that would be considered fraudulent in any other industry apart from “The Precious”. Next is that shareholders have stumped up more money for rights issues in return for promises that things could only get better, when they have in fact got worse. So there has been enormous value destruction, or if you prefer a financing of issue one. The third is the impact on the wider economy as Deutsche and the other zombie banks are in no fit state to support it.

The past point is intangible but important. Because in response to that problem we keep getting lower interest-rates and yields which makes the banks weaker and the whole cycle starts again.

This morning’s share price rally has faded a bit and the shares are up 2% at 6.15 Euros, probably because there are as many holes in the new plan as John Lennon sang about.

I read the news today, oh boy
Four thousand holes in Blackburn, Lancashire
And though the holes were rather small
They had to count them all
Now they know how many holes it takes to fill the Albert Hall

On the other side of the coin is the nagging issue that the banking business model has gone too.


Better economic prospects for the Euro area come with ever more negative bond yields

There is plenty of economic news out of the Euro area for us to chew on and as ever we will ignore the politics, unless it directly affects the economics as looks like will happen in Italy and may do so in Greece. But let me open with not a new development but a continuation of something we looked at back on the 9th of April and 27th of March, as we considered how permanent a feature negative interest-rates will be and whether people will continue to be paid to issue debt?

Maintaining Low Interest Rate Environment Is Completely Justified And Necessary In Light Of Economic Situation ( @LiveSquawk )

That is from ECB Governing Council Member Francois Villeroy who is also Governor of the Bank of France who has been speaking this morning. As you can see he has no plans for changes as we note we can expect more of this and in fact so much so that we got an attempt at deflection from him as we continue the @LiveSquawk updates.

ECB’s Villeroy: ECB Needs Time To Assess Impact Of Negative Rates

Seeing as they started around five years ago that is a bit rich to say the least! It was on the 11th of June 2014 that the Deposit rate was cut to -0.1% and it was subsequently reduced to the current -0.4%. Also it contradicts what ECB President Mario Draghi has been telling us as on more than one ocassion he has claimed that a combination of ECB negative interest-rates and QE has added around 1.5% to Euro area GDP. This is a common event these days where central bankers are happy to bask in any favourable news but then deflect any problems elsewhere. Or if you prefer they behave like politicians.

The Banks

No doubt the Governor of the Bank of France was pleased he could quickly move on from the wider economy and get onto what really concerns a central banker which is the banks.

ECB’s Villeroy: Monetary Policy Also Has Favourable Effect For Banks

It often gets forgotten now but the large interest-rate cuts benefited the banks via the way that mortgage interest-rates were then cut. Also they benefited via their holdings of bonds from the sovereign and corporate QE. Also as those policies continued they boosted house prices as highlighted by the numbers from Eurostat below.

House prices rose by 4.2% in both the euro area and the EU in the fourth quarter of 2018 compared with the same quarter of the previous year.

As a broad sweep house prices started rising in the spring of 2015 and from 98 then have risen to 114 now.

And yet there is still as Taylor Swift would say “trouble,trouble,trouble” for banks.

ECB’s Villeroy: Impact Of Low Interest Rate On Banks Should Neither Be Ignored Nor Blown Out Of Proportion.

Okay but there was more.

ECB’s Villeroy: Main Prerequisite For Banks To Improve Profitability Is For Them To Put In Place Restructuring Strategies

Good luck with that as after all if that was what was happening we would hardly be here would we? The totem pole for banking in the Euro area is of course Deutsche Bank and this morning we see its share price is falling again ( 1%) to 6.37 Euros which compares to more like 13 Euros when the ECB began its negative interest-rate policy which speaks for itself.

That leads us into the current trap that banking often finds itself in the Euro area. The banks need more capital but the share price makes that expensive, especially for shareholders who have had to dip into their wallets and purses before.

Money Supply

The last couple of months have seen the money supply data turn into a bright spot for the Euro area economy. So let us get straight to the narrow money data which has worked so well as an indicator of economic prospects.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.4% in April, compared with 7.5% in March.

So not quite as improved as March but still an improvement overall. This is because the annual rate of growth fell to 6.2% in January after a generally declining sequence below 7% in the latter part of last year. Or if you prefer we are back to similar levels to last summer. Therefore I continue to expect Euro area economic growth to be of the order of the 0.4% we saw in the first quarter. The challenge to that comes from the external environment such as the trade wars and should we see a continuation of the weaker money supply data from the US.

We can now look at the impact of QE and negative interest-rates on the narrow money supply and see that it raised the annual rate of growth from about 5% to 11.7% quite quickly. As the money supply grew then rates of growth were likely to fall but we did see 9.7% in September 2017. Interestingly money supply growth seems to have been affected more by the reduction in QE than its end. Maybe that is because whilst the new purchases have stopped it is mot maturing and reinvestment is then taking place. For example this totalled 23.4 billion Euros in April.

Looking Further Ahead

The outlook a couple of years ahead continues to improve a little.

Annual growth rate of broad monetary aggregate M3 stood at 4.7% in April 2019, after 4.6% in March (revised from 4.5%)

We know that narrow money headed the opposite way leaving us noting quite a compositional change taking place.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 0.5% in April from -0.2% in March. The annual growth rate of marketable instruments (M3-M2) was -5.9% in April, compared with -5.7% in March.

There is also a structural breakdown of the supply side but that is unreliable and in the case of my home country the UK relying on it was a failure. So we are left with the view that two years ahead there will be an uptick but the catch is that it might be as much in inflation as in growth. For example it might follow the Iron Ore price which hit a six-year record in Australian Dollars earlier today.


The improvement we have been seeing in the money supply data seems now to be feeding into the official sentiment indicator.

In May 2019, the Economic Sentiment Indicator (ESI) increased in the euro area (by 1.2 points to 105.1)…..Industry confidence booked the first solid improvement (+1.4) in thirteen months, thanks to the sharpest increase in managers’ production expectations in 6 ½ years, as well as more favourable assessments of the stocks of finished products………..Consumer confidence firmed (+0.8), propelled by households’ brighter
expectations about the general economic situation,

This makes me look again at the remarks by the Governor of the Bank of France who seems to be preparing us for a continuation of the negative interest-rate policy or NIRP. As overall economic prospects have improved we have seen more negative bond yields rather than less as the biggest three Euro area economies ( Germany, France and Spain ) all have negative two year yields and only Spain’s 0.05% stops them have negative five-year yields as well. We only stop at the fourth largest economy because it is the special case called Italy where bond yields are rising again.

So here we are again listening to Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble


This week on the trend for mortgage rates which as it happens applies to the Euro area as well as the UK.




Deutsche Bank and RBS continue to headline the zombie bank era

A feature of the credit crunch era has been like an episode of Hammer House of Horror. This has been the march of the Zombie banks where a burst into normal life is always promised but never seems to actually arrive. More than a decade later in some cases we find ourselves observing them still being on the march. Apart from problems which this raises for shareholders there are three big issues from this. The first is economies which are tilted towards the preservation of what in Lord of The Rings style we have named “The Precious” which we can see in two ways. One is economic policy which the European Central Bank is demonstrating by responding to the Euro area economic slow down with yet another banking subsidy called the TLTRO. The other is the way that bank profits are privatised and losses socialised by the way that the UK still has some £555 billion of gross debt and £305 billion of net debt on its books from the bank bailouts. Third is the effect of Zombification itself as described by the Bank for International Settlements last September.

Using firm-level data on listed firms in 14 advanced economies, we document a ratcheting-up in the prevalence of zombies since the late 1980s. Our analysis suggests that this increase is linked to reduced financial pressure, which in turn seems to reflect in part the effects of lower interest rates. We further find that zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms.

It is of note they think this has been going on for over 30 years although as the central bankers bank they may well be trying to deflect us from the growth of banking zombies over the past decade.

Two clear cases of zombiefication have been Royal Bank of Scotland and Deutsche Bank and the last 24 hours has brought a flurry of news on both. So let us start with my old employer which is the main bank in Germany.

Deutsche Bank

Here is the BBC from yesterday explaining things which we knew all along.

Deutsche Bank and Commerzbank have abandoned merger talks, saying the deal would have been too risky.

Both banks said the deal would not have generated “sufficient benefits” to offset the costs of the deal.

The German banks only entered formal merger talks last month.

The German government had been supporting the tie-up, with reports saying Finance Minister Olaf Sholz wanted a national champion in the banking industry.

It is interesting how Too Big To Fail or TBTF is now apparently being a “national champion” isn’t it?

Combined, the banks would have controlled one fifth of Germany’s High Street banking business with €1.8 trillion ($2tn; £1.6tn) of assets, such as loans and investments.

The real issue all along was not the assets but the liabilities especially at Deutsche Bank! Anyway perhaps someone at the BBC has a sense of humour.

The deal was seen as a way of reviving the fortunes of both banks.

If we bring ourselves forward in time to this morning then the story has moved on.

Net revenue at its sprawling global investment bank, which accounts for more than half the German bank’s overall revenue and which relies heavily on its bond trading earnings, fell 13 percent to 3.3 billion euros (£2.8 billion).

The German flagship lender posted a net profit of 201 million euros, up 68 percent from a year ago but hardly making up for a net loss of 409 million euros in the fourth quarter as the bank battles stiff competition from U.S. powerhouses. (Reuters).

The share price has responded with a nearly 3% fall to 7.27 Euros. This continues the trend of the last year where it has lost 38% and beyond that because if my chart is any guide the pre credit crunch peak was over 94 Euros. The response on social media to me pointing out these matters has varied from that is 7.27 Euros too high to this from Nicholas Dubois.

Because in my eyes, the market is emotionally driven at the moment in DB, not seeing through the fundamentals – why was the stock up more than 5% yesterday and 10% higher from here ? Noise. CET1@13.7%, VaR only 27m (!) – chance of a lifetime.

How many chances of a lifetime have we had now to invest in banks? As a punt at a low price this can work as for example the Greek banks have shown recently but as a long-term investment you only get poorer.


Again the news started yesterday. From Sky News.

Royal Bank of Scotland (RBS) boss Ross McEwan has quit, saying the time is right to leave as it is in a “much stronger financial position”.

The news was announced ahead of the bank’s annual general meeting in Edinburgh – five-and-a half years after he took over the reins of the part-nationalised lender. ( Sky News)

Somewhat irreverently I suggested that he was clearing the decks so he could apply to be Governor of the Bank of England. Although this from Simon Jack highlights that the reality is of a rather odd sort of resignation.

He is staying till 2020. 12 month notice period

That is rather different to my days in the City of London where if they could not persuade you to change your mind you got sent home with your belongings in a black bin liner.

As to his tenure there are clear issues because RBS is still mostly owned by the taxpayer and whilst it does now have profits here is its own statement from earlier.

RBS reported an operating profit before tax of £1,013 million, compared with £1,213 million in Q1 2018 primarily reflecting £265 million lower income, partially offset by £73 million lower operating expenses.  Q1 2019 attributable profit of £707 million compared with £808 million in Q1 2018.

Up is the new down again, or something like that. We get a deeper perspective from the share price which has fallen 11 pence today as I type this to 239 pence. UK taxpayers of a nervous disposition might like to sit down before reading the next bit.

 still way below the 502p the Labour government paid for them at the height of the crisis. ( Sky News)

Here is the Daily Telegraph from those days back in 2008 and the Chancellor was Alistair Darling.

The Chancellor said the taxpayer would not lose out.

“The taxpayers’ interest is being protected,” he said.

“I’m very clear that in return for all this, the taxpayer has got to see some upside. In relation to lending to small businesses, in relation to mortgages… that’s important too.”



The official story about the banks has sung along with Carly Simon.

I know nothing stays the same
But if you’re willing to play the game
It’s coming around again

They are always about to turn the corner on what turns out to be a Roman road. Also I note the mention of small business lending from a decade ago which has also been a grim theme. Those who have followed my updates on that issue will now that the promises here have required this to believe them.

Are you drunk enough?
Not to judge what I’m doin’ ( Calvin Harris and Sam Smith)

The subject reconvened in the summer of 2012 when the Bank of England claimed it was supporting the area but in fact reverted to type and pumped up mortgage lending by giving the banks yet another subsidy. Meanwhile lending to small and medium-sized businesses has required the use of the establishment’s ultimate admission of failure the use of the word “counterfactual”

I fear that Deutsche Bank is even worse because it has pretty much carried on regardless with the stories about past losses on derivatives never going away. Or to put it another way if big investors really believed they are just an illusion or imagination the share price would be nowhere near here. Now we face another slow down with the banks still singing along with Lyndsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

It all comes down to the fact that the socialisation of losses helped to stop a change in behaviour as for so many the party mostly just carried on. The scandals of what it did to smaller businesses and the 2008 rights issue show that the law of the land often turns its blind eye to the banks as well.





Deutsche Bank and Royal Bank of Scotland continue their zombie bank march

We find ourselves in yet another version of banking Monday and let me immediately note an issue highlighted by moves at the UK’s main zombie bank which is Royal Bank of Scotland or RBS. From the BBC.

A UK payment processing firm that used to be owned by Royal Bank of Scotland has been sold in a deal worth $43bn (£32bn).
WorldPay has been bought by Florida-based Fidelity National Information Services (FIS) for $35bn in cash and shares, plus WorldPay’s debt.

FIS chief executive Gary Norcross said “scale matters in our rapidly changing industry”.

WorldPay was sold by RBS as a condition of the bank’s financial crisis bailout.

The value of the FIS purchase means Worldpay is worth about £8bn more than RBS.

Some perspective is provided by the way WorldPay is worth much more than RBS. It also means that if it has kept it UK taxpayers would have done a lot better as we see yet another shambles delivered by our political establishment.

This is from Finextra in August 2010.

RBS was told to sell off WorldPay – or Global Merchant Services – by the European competition authorities last year as a condition for joining the UK government’s asset protection scheme.

Meaning RBS got this.

Royal Bank of Scotland has inked a deal to sell just over 80% of its WorldPay payments processing unit to private equity firms Bain Capital and Advent International.

The agreement is for an enterprise value of up to £2.025 billion including a £200 million contingent consideration, with RBS keeping a 19.99% stake in the business.

As you can see whilst money was earnt at the time it was much, much less than would have been received today. Oh and the remaining part was sold in 2013. Seems inevitable really doesn’t it? We will never fully know whether the private equity owners of WorldPay drove it forwards or just surfed the wave nor whether RBS ownership would have held it back or worse. But we can see that as the UK and European establishment’s mixed the one part of the RBS business that has charged ahead and would have made a return for taxpayers was flogged off and the loss making dregs were kept. Also we know from experience that it will be nobody’s fault and could not possibly have been foreseen ( makes you wonder why anyone bought it…).

Deutsche Bank and Commerzbank

Reuters was on the case yesterday and they opening with something breathtaking.

Deutsche, the largest bank in Germany, Europe’s biggest economy, emerged unscathed from the financial crash but later lost its footing.

Really? So the share price fall from 94 Euros to 24 Euros in eighteen months was a sort of unfortunate piece of timing! Or maybe not.

Deutsche and other European banks have taken longer to recover from the financial crisis, losing ground to stronger rivals from the United States.

Anyway as we expected last week the story continues to gain momentum.

Berlin wants a reliable national banking champion to support its export-led economy, known for cars and machine tools.

Deutsche Bank is hardly a champion and has been the opposite of reliable unless you are counting unexpected losses. But here is the Sunday news.

Deutsche Bank and Commerzbank confirmed on Sunday they were in talks about a merger, prompting labour union concerns about possible job losses and questions from analysts about the merits of a combination.

Germany’s two largest banks issued short statements after separate meetings of their management boards, a person with knowledge of the matter said, indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.

The choice of Commerzbank reminds me of the bit in the film Zulu when the Colour Sargeant Bourne answers the question why?

Because we are here lad. There’s nobody else, just us

Or as Reuters put it.

Other than Deutsche, Commerzbank is Germany’s only remaining big bank, after a series of mergers.

You would have thought that a series of mergers would have created other big banks as we already see signs of past trouble. Still why stop a plan which is performing badly? Also Commerzbank has its own issues.

Commerzbank, like Deutsche, has struggled to rebound, and German officials say it is vulnerable to a foreign takeover. If an international rival snapped it up, that would increase competition for Deutsche on its home turf.

Berlin also wants to keep Commerzbank’s speciality – the funding of medium-sized companies, the backbone of the economy – in German hands.


On the 11th I pointed out I was dubious about large losses in bond markets. But it would appear that the people we are regularly told are highly talented and worth large bonuses continue to do things like this.

Commerzbank, for example, has about 30.8 billion euros of debt securities such as Italian bonds that now have a value of 27.7 billion euros – a drop of 3.1 billion euros. A tie-up could crystallise this loss. Deutsche has such securities at market value in its accounts.

To make a loss in bond markets when they in general have seen surges and what the Black Eyed Peas would call “Boom!Boom! Boom!” is something else to look into. Also the government is caught in something of a spider’s web from it past actions concerning Commerzbank.

The government holds a 15 percent stake after bailing it out during the crisis, giving it an important voice.

If we move to the statement from Christian Sewing the CEO of Deutsche Bank we are left wondering “economic sense” for who?

What is also important to me is that we will only pursue options that make economic sense, building on the progress we made in 2018.


We are seeing ever more consequences of the zombie bank culture. In the UK the RBS saga has reminded us today that the rhetoric of the bailout which claimed that taxpayers would get their money back put a smokescreen over the reality that it involved selling what has turned out to be the most profitable part of it. That echoes as we note a bank worth less than half of what was poured into it. The “privatistaion of profits and socilaisation of losses” them gets turned up to 11 one more time.

Moving to the Deutsche Bank merger with Commerzbank let me open with the obvious issue that solving the Too Big To Fail or TBTF issue is not going to be done by making it even larger. They did manage a cosmetic name change to  G-Sifs or Globally Significant banks but that is it. Also arrows will be flying in the direction of Mario Draghi and the ECB about how its negative interest-rate policy has helped trap the banks in the zombie zone. They get help ( TLTRO is coming) in a liquidity sense but not in a solvency sense.

Also we are told the banks support the economy and yet this keeps turning up.

 A merger with Commerzbank would face opposition from unions, which expect as many as 30,000 jobs to be lost. And the combined bank would probably lose some business from German companies keen to diversify their sources of funding. ( Reuters)

For it to work we need plenty of smoke and mirrors as @jeuasommenulle points out.

Finally, an “amusing” one for the geeks: a very large part of the financials of the deal rely on the regulatory treatment of the negative goodwill the deal would generate (we’re possibly talking of 15-20bn€!)…….Positive goodwill is deducted from CET1, but negative isn’t – which does not make any sense if you ask me. Why is that ? Because when the CRR was drafted nobody thought of that so the wording is vague.