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.

RBS

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.”

 

Comment

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.

 

 

 

 

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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.

Problems

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.

Comment

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.

 

Will we always be second fiddle to the banks?

The situation regarding the banks is one that has dominated the credit crunch era as we started with some spectacular failures combined with spectacular bailouts. Yet even a decade or so later we are still in a spider’s web that if we look at say Deutsche Bank or many of the Italian banks still looks like a trap. Economic life has been twisted to suit the banks such that these days a new Coolio would be likely to replace gangsta with bankster.

Keep spending most our lives, living in the gangsta’s paradise
Keep spending most our lives, living in the gangsta’s paradise

Power and the money, money and the power
Minute after minute, hour after hour

Although upon reflection with all the financial crime that the banks have intermediated perhaps he was right all along with Gangsta. This morning has brought more news on this front as we note this from Sky News about HSBC.

HSBC has agreed to pay $765m (£588m) to the US Department of Justice (DoJ) to settle a probe into the sale of mortgage-backed securities in the run-up to the financial crisis.

It is the latest bank to settle claims of mis-selling toxic debt before the financial crisis.

HSBC has paid a lot less than the  Royal Bank of Scotlandwhich agreed to pay $4.9bn in May and Barclays’ $2bn settlement with the DoJ in March.

This is just one example of the many criminal episodes emanating from the banks and if we stay with HSBC there was also this reported by The New Yorker.

 In 2012, a U.S. Senate investigation concluded that H.S.B.C. had worked with rogue regimes, terrorist financiers, and narco-traffickers. The bank eventually acknowledged having laundered more than eight hundred million dollars in drug proceeds for Mexican and Colombian cartels. Carl Levin, of Michigan, who chaired the Senate investigation, said that H.S.B.C. had a “pervasively polluted” culture that placed profit ahead of due diligence. In December, 2012, H.S.B.C. avoided criminal charges by agreeing to pay a $1.9-billion penalty.

The tale of what happened next is also familiar.

The company’s C.E.O., Stuart Gulliver, said that he was “profoundly sorry” for the bank’s transgressions. No executives faced penalties.

Yet in spite of all the evidence of tax evasion and money laundering in the banking sector the establishment bring forwards people like Kenneth Rogoff to try to deflect the blame elsewhere. First blame cash.

Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime. ( The Guardian )

Then should anything look like being some sort of competition raise fears about it too.

But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity.

Does he mean like the banks do?

Competition seems to get blocked

This morning has seen this reported by the Financial Times.

Britain’s peer-to-peer lending industry fears being stripped of one of its key advantages after the UK regulator proposed to block the access of many retail investors, alarming some senior executives in the nascent sector. “This is a moment,” said Rhydian Lewis, chief executive of RateSetter, one of the UK’s biggest peer-to-peer lending platforms. “They are looking to restrict this new industry and it is wrong. This is how things get stymied.”

Still in some ways it is a relief to see the Financial Conduct Authority or FCA actually have some powers as after all it was only last week they were telling us they were short of them.

Given the serious concerns that were identified in the independent review it was only right that we launched a comprehensive and forensic investigation to see if there was any action that could be taken against senior management or RBS. It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.

It is important to recall that this was a very serious business involving miss selling and then quite a cover up which the ordinary person would regard as at the upper end of serious crime. Businesses were heavily affected and some were forced into bankruptcy. Yet apparently there were no powers to do anything about what is one of the largest financial scandals of this era in the UK. It is hard not to mull on the fact that a few years ago the FCA was able to ban someone for life from working in the City of London because of evading rail fares.

However if you are a competitor to the banking sector you find that inquiries and regulation do apply to you. However what was the selling of derivative style products to small businesses somehow escapes the net.

It is not the banks fault

A very familiar theme has been played out since the Bank of England announced a rise in UK interest-rates at midday on Thursday. The reality is that many mortgage rate rises were announced immediately but as social media was quick to point out there was something of a shortage of increases in savings rates. Here is one way this was reported by the BBC over the weekend.

Millions of people could get a better return on savings by switching deals rather than waiting for banks to increase rates, experts say.

A huge number of savers leave money languishing in old accounts with poor rates of interest, often with the same provider as their current account.

The City regulator says they are missing out on up to £480m in interest.

So it’s our own fault and we need to sharpen up! As us amateurs limber up the professionals seem to be playing a sort of get out of jail free card that in spite of being well-thumbed still works.

Following the previous Bank rate rise in March, interest paid on half of all savings accounts failed to rise at all. Of those that did, the average rise did not match the Bank of England’s increase.Since Thursday’s rise there has been very little movement in rates,………..

Oh and March seems to be the new November at least at the BBC.

We also got a hint as to why the environment might be getting tougher for peer-to-peer lenders.

Bank of England governor Mark Carney suggests new entrants are increasing competition, creating better deals.

Comment

There is quite a bit to consider here as we look around UK banking. Looking at RBS there is the problem that the UK is invested at much higher levels. The 251 pence of this morning is around half the level that the UK government paid back in the day. Perhaps that explains at least some of the lack of enthusiasm for prosecuting it for past misdemeanours. Especially as the sale of 7.7% of its shares back in June illustrated a wish to get it off the books of the UK public-sector which still holds around 62%.

I note over the weekend the social media output of HSBC finds itself under fire reminding us of an ongoing issue..

Planning your next trip? Get cash before you go, to make the most of your holiday time.

The response is from Paul Lewis who presents Radio 4’s MoneyBox.

Dreadful advice. (a) HSBC rates not great (b) using a HSBC card abroad is subject to a hefty surcharge but using a Halifax Clarity card is not. This is why never go to a bank for advice it’ll only give you sales.

The old sales/advice issue rears its ugly head again as we note that the advice will of course be rather good for the profits of HSBC.

Moving onto the FCA and the Bank of England it is hard to see a clearer case of regulatory capture or as Juvenal put it so aptly back in the day.

Quis custodiet ipsos custodes?

Or who regulates the regulators?

 

 

What is it about RBS and the banks?

A major feature of the credit crunch was the collapse of more than a few banks as a combination of miss pricing, bullish expansionism and arrogance all collided. This led to the economic world-changing as for example the way we now have extremely low ( ZIRP) and in more than a few places negative interest-rates and of course all the QE bond purchases which are ongoing in both the Euro area and Japan. So lower short and long-term interest-rates and that is before we get to the cost of the bailouts themselves. The US and UK acted early but others took longer as my updates on Italy for example explain and describe. It’s Finance Minister ( Padoan ) even had the cheek to boast about not helping its banks which then created ever larger bad loans.

The essential problem is that this is still ongoing as the news from Royal Bank of Scotland overnight tells us.

Royal Bank of Scotland on Tuesday agreed a $500m settlement with New York State over mis-selling residential mortgage-backed securities in the run-up to the financial crisis………..The agreement requires the bank to pay $100m in cash and to provide $400m of consumer relief in New York. It is the latest in a series of settlements with US authorities that has resulted in banks handing over $150bn in payments and fines since the crisis.

This is yet another in a series that feels like rinse and repeat but we are now a decade on from things heading south for RBS as on the 22nd of 2008 what was the largest rights issue ever in the UK took place. The £12 billion cash from that did not even last 6 months as on the 13th of October the UK government stepped in. In other words the documents from that rights issue look to have been about a misleading as they could be along the lines of Sir Desmond Glazebrook in Yes Prime Minister who when asked about the rules replied “They didn’t seem quite appropriate”.

So we have ended up with something that looks like a bottomless pit although as ever it is put PR style.

Ross McEwan, chief executive, said: “We have been very clear that putting our remaining legacy issues behind us is a key part of our strategy.”

Legacy issues indeed and of course a much larger one is on its way.

RBS, part-owned by the UK government, has set aside $4.4bn to deal with residential mortgage-backed security claims in the US and recently revealed its first annual profit in nine years.

This poses its own question as we mull the latest development which is for only one state.

Ian Gordon, an analyst at Investec, said the deal with New York was “a disturbingly large single-state settlement ahead of the main event”.

Any new settlement would add to this.

 

RBS has been trying to close the door on misconduct issues from the crisis and in 2017 agreed to pay £4.2bn to the US Federal Housing Finance Agency in relation to mortgage-backed securities.

What about the law?

This seems to have been missing from the banking sector and especially in the case of the 2008 rights issue of RBS. However this morning has brought news that you can be jailed for financial crimes. From the BBC.

A group of fraudsters who conned UK consumers out of £37m by selling passports and driving licences through copycat websites have been sentenced to more than 35 years in jail.

The six people, led by Peter Hall and including his wife Claire, operated websites that impersonated official government services.

Perhaps the establishment was upset by the way they were impersonated but we are left with the thought that as the crime was compared to the banks small-scale it could be punished. Along the way something seemed rather familiar though.

 “This was a crime motivated by greed. This group defrauded people so they could enjoy a luxury lifestyle.”

If we actually move to banking crime a somewhat different set of rules seem to apply. Yesterday the Financial Conduct Authority finally banned the man called the Crystal Methodist due to his drug taking proclivities but of course Chair of the Co-op Bank which nearly collapsed.

Mr Flowers was Chair of Co-op Bank between 15 April 2010 and 5 June 2013. The FCA found that Mr Flowers’ conduct demonstrated a lack of fitness and propriety required to work in financial services.

So our first thought is to sing along with the Doobie Brothers.

Gotta keep on pushin’ Mama
‘Cause you know they’re runnin’ late

After all most of us knew there was “trouble,trouble,trouble” as Taylor Swift would out it in June 2013. However when you see what he was banned for it is hard not to let off some steam.

The FCA found that while Chair Mr Flowers:

 

used his work mobile telephone to make a number of inappropriate telephone calls to a premium rate chat line in breach of Co-op Group and Co-op Bank policies;

and used his work email account to send and receive sexually explicit and otherwise inappropriate messages, and to discuss illegal drugs, in breach of Co-op Group and Co-op Bank policies despite having been previously warned about his earlier misconduct.

In addition, after stepping down as Chair, Mr Flowers was convicted for possession of illegal drugs.

As you can see destroying a bank and causing losses in some cases substantial to a large number of people does not appear on the charge sheet whilst calling a premium rate chat line does.

Helping the economy

We were told the economy would not be able to survive without the banks yet as time has gone on they are still deleveraging. From Which.

In December last year, RBS/Natwest announced that it was closing a staggering 259 bank branches in 2018 – a quarter of its branch network. That included 62 RBS and 197 NatWest branches, plus 11 Ulster Bank branches which were previously announced.

The UK taxpayer will also be grimly observing this as the share price falls another 5 pence at the time of typing this to £2.59 as opposed to the £5.02 paid for its holding.

Comment

There are various problems with the state of play. The first is the way that the law pretty much only applies one way regarding the banks. If we misbehave we can expect to be punished sometimes severely. I have no axe to grind with that until we note that it at best intermittently applies to the banks themselves and even less to those at the top of the food chain. For example whilst Santander is perfectly at liberty to pay bonuses which Nathan Bostock would have received at RBS this raises hackles to say the least when it was from the GRG section which wrecked havoc amongst so many small businesses. It seems that bank directors are even more an example of the “precious” than the banks themselves. If we do not make changes how can we expect matters to improve?

When a bank is bailed out we are never told the full truth as this emerges later and sometimes much later as the news today is around a decade after the event. When the truth requires drip feeding well that speaks for itself. Also I note that in the intervening decade this issue goes on and on. From the Financial Stability Board.

The activity-based, narrow measure of shadow banking grew by 7.6% in 2016, to $45.2 trillion for the 29 jurisdictions……..Monitoring Universe of Non-bank Financial Intermediation (MUNFI) – This measure of
all non-bank financial intermediation grew in 2016 at a slightly faster rate than in 2015 to an aggregate $160 trillion.

We need to take care as one day that will rise to a lot of money! Also wasn’t this supposed to have been a problem pre credit crunch?

 

 

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?

 

 

 

 

 

 

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.

 

 

 

 

It is always the banks isn’t it?

Perhaps the most regular theme of the credit crunch era is the problems of the banks and the finance sector. This is quite an (anti ) achievement as we note that if we count from problems at Bear Sterns the credit crunch is now into its second decade. In only a couple of months or so it will be ten years since Northern Rock began its collapse. We are regularly told by our establishment that there has been reform and repair along the lines of this from Alex Brazier of the Bank of England that I analysed only on Tuesday,

The financial system has been made safer, simpler and fairer.

Banks, in particular, are much stronger. British banks have a capital base – their own shareholders’ money – that is more than 3 times stronger than it was ten years ago.

They can absorb losses now that would have completely wiped them out ten years ago.

Lloyds Banking Group

I pointed out on Tuesday that it was hard to know whether to laugh or cry at the “simpler and fairer” claim and this morning there is this announcement to consider.

This was after taking additional provisions for PPI and other conduct related issues which was disappointing. The Group is also currently undertaking a review of the HBOS Reading fraud and is in the process of paying compensation to the victims of the fraud for economic losses, ex-gratia payments and awards for distress and inconvenience.

Later we got some details on the monetary amounts involved.

The £1,050 million charge for PPI includes an additional £700 million provision taken in the second quarter reflecting current claim levels, which remain above the Group’s previous provision assumption. The additional provision will now cover reactive claims of around 9,000 per week through to the end of August 2019,

The good news from this is that the UK economy will get another £700 million of PPI style Quantitative Easing which seems to be much more effective than the Bank of England version.  The bad news is that the saga goes on and on and on in spite of us being told so many times that it is now over. Indeed the rate of provision has doubled from last time around. This means that in total Lloyds either has or is about to provide this in terms of PPI style QE. From Stephen Morris of Bloomberg News.

Lloyds Bank takes ANOTHER £700m in charges today, taking their total since 2011 to 18.1 BILLION POUNDS………This is the 17th time the bank has increased its provisions for the scandal.

This is a feature of the ongoing banking scandal where we are drip fed the news as a type of expectations management as another bit is announced and we are told it is the last time again and again. The issues are legacy ones from the past but the management and response cycle has not changed. Actually if we look at the total numbers for misconduct New City Agenda has some chilling ones.

has now set aside £22.5 bn for misconduct since 2010

If we go wider to the whole industry it calculates this.

Total amounts set aside for PPI redress now stand at £42.1 billion – around 4.5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 10 times over the past 3 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs.

If we return to the QE style impact it does make me wonder how much of the UK economic recovery has been due to this as we note for example its possible contribution to car sales. If we throw in every type of miss selling the total comes to £58.1 billion.

Before we move on there was also this. From the Financial Times.

The bank has also set up a £300m compensation scheme to repay 600,000 mortgage customers as a result of failings in its arrears policies between 2009 and 2016,

How can there be recent failings when everything is supposed to have been reformed?

Lending

On Tuesday Alex Brazier warned about looser lending standards. But according to Lloyds Bank in the Financial Times it is everybody else.

 

Mr Horta-Osório said the bank has been increasing its consumer lending — comprising credit cards, personal loans and car finance — at less than 4 per cent a year over the past six years, and remains under-represented in the sector versus its size.

I am very cautious about anyone who uses this sort of swerve “over the past 6 years” as no doubt 2011 and 12 are included ( remember the triple dip fears?) to get the number down. Still the Alex Brazier should be alert to that as it is exactly the sort of swerve the Bank of England uses itself.

Royal Bank of Scotland

We cannot look at UK banks and miss out RBS can we?! It did make BBC News earlier this month.

Royal Bank of Scotland has agreed a £3.65bn ($4.75bn) settlement for its role in the sale of risky mortgage products in the US before the financial crisis.

Also there is the on-going saga about the on and now off sale of Williams and Glyns. If I recall correctly around £1.8 billion was spent on this and the bill is rising yet again.From the BBC.

The European Commission has accepted a UK government plan to free Royal Bank of Scotland from an obligation to sell its Williams & Glyn division……..Under the new deal, which the EU has accepted “in principle”, RBS would spend £835m to help boost competition.

Deutsche Bank

My old employer has seen plenty of scares in the credit crunch era. For the moment it seems to mostly be in the news via its likes to both the Donald and his circle. From the New York Times.

During the presidential campaign, Donald J. Trump pointed to his relationship with Deutsche Bank to counter reports that big banks were skeptical of doing business with him.

After a string of bankruptcies in his casino and hotel businesses in the 1990s, Mr. Trump became somewhat of an outsider on Wall Street, leaving the giant German bank among the few major financial institutions willing to lend him money.

Well as this from the Wall Street Journal points out today’s results have brought both good and bad news.

The German lender said Thursday net income was €466 million ($548 million), compared with €20 million for the same period a year earlier. Deutsche Bank’s companywide revenues declined 10% from the year-ago period, to €6.6 billion.

Comment

There is much here that seems familiar as the claimed new dawn looks yet again rather like the old one. There has been a reminder of this from another route today as the establishment reform agenda has led to this.

FCA say Li(e)bor is to end in 2021 citing that the bank benchmark is untenable  ( @Ransquawk)

Good job there is no rush to do this like a big scandal destroying any credibility it had or something like that.  We need a modern benchmark for new trades starting now whilst a sort of legacy Libor is kept for the existing contracts that cannot be changed.

Still there is always an alternative perspective on it all as this headline from Reuters indicates.

Lloyds bank posts biggest half-year profit since 2009