“All bets are off” as the Bank of England holds a “secret” press conference

Today is the turn of the Bank of England to take centre stage. On a personal level it raises a wry smile as when I was a market maker in UK short sterling options (known as a local) on the LIFFE floor it was the most important day of the month and often make or break. At other times it has been a more implicit big deal. Actually there is no likely change to short-term interest-rates on the cards. Perusing my old stomping ground shows that in fact not much action is expected at all with a pretty flat curve out to March 2024 when maybe a rise to the giddy heights of 0.25% is expected. Personally I think there is a solid chance we will see negative interest-rates first but that is not how the market is set this morning. Also I note that volumes are not great suggesting they are not expecting much today either.

If course some may be “more equal than others” to use that famous phrase as the Monetary Policy Committee voted last night following one of the previous Governor’s ( Mark Carney) “improvements”. He was of the opinion that getting his Minutes and PR prepared was more important than the risk of the vote leaking. Whereas the reality is that central banks are in fact rather leaky vessels.

Nationwide

There will have been consternation at the Bank of England when this news arrived at its hallowed doors. From the BBC.

The UK’s biggest building society has tripled the minimum deposit it will ask for from first-time buyers. The Nationwide will lower its ceiling for mortgage lending to new customers in response to the coronavirus crisis.It said the change, from Thursday, was due to “these unprecedented times and an uncertain mortgage market”.

I do not know if the new Governor Andrew Bailey has the same sharp temper as his predecessor Mark Carney but if he does it would have been in display. After all policy is essentially to get the housing market going once we peer beneath the veneer. Nearly £118 billion of cheap funding ( at the Bank Rate of 0.1%) has been deployed via the Term Funding Scheme(s) to keep the housing market wheels oiled. Also the news looks timed to just precede the MPC meeting.

In terms of detail there it is aimed at first-time buyers which is only likely to anger the Governor more.

First-time buyers are likely to be the most significantly affected because they often have smaller amounts saved to get on the property ladder.

Nationwide has reduced the proportion of a home’s value that is willing to lend from 95% to 85%.

So for example, if a property costs £100,000, a new buyer would now need a £15,000 deposit rather than a £5,000 deposit.

If we look back in time this is a familiar feature of house price falls. As mortgage borrowing becomes more restrained that by its very nature tends to pull house prices lower. For larger falls then it usually requites surveyors to join the party by down valuing some properties which as they are pack animals can spread like wildfire. The quote below shows that the situation is complex.

Some lenders, such as HSBC, still have mortgages with a 90% loan-to-value ratio. However, there is more demand for that type of mortgage than many banks have the capacity to deal with at the moment, he said.

Policy

We have already seen an extraordinary set of moves here. We have a record low interest-rate of 0.1% which is quite something from a body which had previously assured us that the “lower-bound” was 0.5%. There is a link to today’s news from this because it was building societies like the Nationwide and their creaking IT systems which got the blame for this, although ironically I think they did us a favour.

Next comes a whole barrage of Quantitative Easing and Credit Easing policies. The headliner here is the purchases of UK bonds ( Gilts) which by my maths passed the £600 billion mark just before 2 pm yesterday as it progresses at a weekly rate of £13.5 billion. This means that they are implicitly financing the UK public-sector right now, something I pointed out when the Ways and Means issue arose. We see that as I note that the UK Debt Management Office has issued some £14.4 billion of new UK bonds or Gilts this week. Whilst the Bank of England did not buy any of these it did oil the wheels with its purchases which means that the net issuance figure is £900 million which is rather different to £14.4 billion. On that road we see how both the two-year yield ( -0.07%) and the five-year yield ( -0,02%) are negative as I type this. Even the fifty-year yield is a mere 0.38%.

There has also been some £15 billion of Corporate Bond buying so far. This policy has not gone well as so desperate are they to find bonds to buy that they have bought some of Apple’s bonds. Yes the company with the enormous cash pile. Also I sure the Danes are grateful we are supporting their shipping company Maersk as it appears to need it, but they are probably somewhat bemused.

As to credit easing I have already noted the Term Funding Scheme and there is also the Covid Financing Facility where it buys Commercial Paper. Some £16.3 billion has been bought so far. Those who like a hot sausage roll may be pleased Greggs have been supported to the tune of £30 million, although North London is likely to be split on tribal lines by the £175 million for Spurs.

Comment

These days central banks and governments are hand in glove. Operationally that is required because the QE and credit easing measures require the backing of the taxpayer via HM Treasury. More prosaically the Chancellor Rishi Sunak can borrow at ultra low levels due to Bank of England policies and will do doubt raise a glass of champagne to them. Amazingly some put on such powerful sunglasses that they call this independence. Perhaps they were the ones who disallowed Sheffield United’s goal last night.

However the ability to help the economy is more problematical and was once described as like “pushing on a string”. This is not helped by the issues with our official statistics as we not inflation has been under recorded as I explained yesterday as has unemployment ( it was 5% + not the 3.9% reported) and the monthly drop of 20.4% in GDP has a large error range too. Because of that I have some sympathy for the MPC but I have no sympathy for the “secret” press conference it is holding at 1 pm. Then its “friends” will be able to release the details at 2:30 pm with no official confirmation until tomorrow.

So there are two issues. That is a form of corruption and debases what is left of free markets even more. Next it is supposed to be a publicly accountable institution with transparent policy. Along the way it means that the chances of a more aggressive policy announcement have just risen or as the bookie says in the film Snatch.

All bets are off

UK Money Supply surges as Unsecured Credit Collapses

Today brings the UK monetary situation into focus and to say it is fast moving is an understatement. Let me illustrate in terms of QE or Quantitative Easing where the current rate of purchases is £13.5 billion a week and the total by my maths is now £507 billion. This means we have seen an extra £72 billion in this Covid-19 pandemic phase. Looking at it from a money supply point of view means that in theory an extra £72 billion has been added. We have seen before that in practice QE does not always flow into the money supply data as the theory tells us but I also note that the ECB figures we looked at earlier this week were responding to its QE actions.

Next comes the other programmes where again the heat is on. The Covid Corporate Financing Facility has bought some £15.9 billion of Commercial Paper and in return supplied liquidity. Next comes the Corporate Bond programme which has bought around £2 billion so far. They do not provide much detail on the Corporate Bond purchases to avoid me pointing out that for example they are buying Apple and Maersk. Last on the list is the new version of the Term Funding Scheme supplying liquidity to banks at 0.1% and it claims to have supported £8.2 billion of new loans.

So we awash with liquidity if not actual cash. Now let us look at the impact until the end of March as we look at this morning’s data.

Money Supply

I think we can say we see an impact here! The emphasis is mine.

The amount of money deposited with, and borrowed from, banks and building societies by private sector companies and households overall rose very strongly in March. Sterling money holdings by households, non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs), known as M4ex, rose by £57.4 billion in March, a series high and far above its previous six-month average of £9.0 billion. Sterling borrowing from banks (M4Lex) rose by £55.3 billion, also a series high and up from its previous six-month average of £5.1 billion.

Or as DJ Jazzy Jeff and the Fresh Prince would say.

Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Tic-tic-tic-tic Boom!
Well yo are why’all ready for me yet
(pump it up prince)

Or more prosaically,

The strength in money was broad based across sectors, with the largest increases since these series began for households (first published in 1963), PNFCs (1963) and NIOFCs (1998). (  non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs))

If we switch to the money supply implications then the 2.4% rise in March was as much as not so long ago we were seeing in a year. The annual growth rate of 7.4% is the highest we have seen for some time and next month we will break the numbers posted by the Sledgehammer QE effect in the autumn of 2016 and the spring of 2017. Actually I think we will break the all-time record for M4 anyway ( yes for my sins I still recall the £M3 days) but that is for another day.

Consumer Credit

There are some numbers here which in the previous regime would be too much for the morning espresso of Governor Carney and would have him summoning a flunkey from the Bank of England bar to fetch him his favourite Martini as he would be both shaken and stirred,

The weak net flows of consumer credit meant that the annual growth rate fell to 3.7% in March, lowest since June 2013. Within this, the annual growth rate of credit card lending fell to -0.3%, the first negative annual growth since the series began. The annual growth rate of other loans and advances fell to 5.6%.

The first Governor of the Bank of England to preside over negative annual credit card growth. I guess he and the new Governor Andrew Bailey will be playing a game of pass the parcel with that one!

This is a similar effect to what we saw in the credit crunch with households battening down the hatches by repaying credit with this time around settling your credit card in the van.

Households repaid £3.8 billion of consumer credit, on net, in March, the largest net repayment since the series began . Within this, credit cards accounted for £2.4 billion of net repayments and other loans and advances accounted for £1.5 billion.

Indeed the net figures may not do the gross data full justice.

This very weak net lending reflected a larger fall in new borrowing that was partially offset by slightly lower repayments. Gross lending was £5.4 billion weaker than February, while repayments were £1.3 billion lower.

Business Lending

This is something of a bugbear of mine as back in the summer of 2012 we were promised the the Funding for Lending Scheme would boost it, especially for smaller businesses. How is that going?

Within this, the growth rate of borrowing by large businesses increased sharply, to 11.8%, and growth by SMEs rose to 1.2%, from 0.9% in February.

Looking at the numbers for smaller businesses we are seeing two failures here. First the initial failure to get cash to them and second the conceptual failure over the past 8 years as the schemes to help them have recorded very little growth at best and sometimes none at all. In fact the situation has been so bad that the word counterfactual has been deployed which has two effects. For those that do not understand what it means it sounds impressive whilst leaving those that do mulling how giving £107 billion to the banks in the TFS had so little effect. Almost as if it was designed to do that.

Of course it is much easier to lend to larger businesses.

UK businesses’ deposits rose by £34.0 billion in March. Changes in deposits and loans were closely correlated across industries.

That bit is awkward. Did those that got it, not need it?

Mortgages

We open with a bit of all our yesterdays.

Mortgage borrowing picked up a little in March, with a net increase of £4.8 billion. The annual growth rate also rose a little, to 3.6%. Mortgage borrowing tends to lag approvals, however, so this strength is likely to reflect strength in approvals in previous months.

Then we get a bit more with the current reality.

In the mortgage market, evidence of a decline in housing market activity started to become apparent in March mortgage approval statistics, which fell by just over 20% (Chart 4). This was a broad based fall across reasons for applying for a mortgage. Approvals for house purchase fell by 24% to 56,200, their lowest level since March 2013; and approvals for remortgage fell 20% to 42,600, the fewest since August 2016. ‘Other’ approvals, which includes for withdrawing equity, fell back 17%, to 12,000.

Looking ahead with Gilt yields here we are likely to see more people look at a remortgage as my indicator for fixed-rate mortgage trends the five-year Gilt yield is a mere 0.1%. Of course there is also the issue of the market essentially being frozen.

Comment

Let me remind you that the broad money numbers are supposed to be a predictor of nominal GDP growth ( economic output) around two years ahead. So if we say we will be lucky to be back to where we were at the start of 2020 in two years time we would expect inflation of the order of 7% or so. Care is needed because the impulse these days is often seen in asset markets and is in my opinion a driver behind the stock market rally we have seen. That factor is why I argue to put house prices in consumer inflation measures in spite of the fact that for them “down, down” by Status Quo is more likely than Yazz’s “The only way is up” for this year. Although some seem to have spotted an alternative universe.

Nationwide said on Friday its measure of house prices rose by 0.7% in April from March and was 3.7% higher than a year earlier, stronger than forecasts in a Reuters poll of economists in both cases. ( Reuters)

Really?

Now let me look at another alternative universe or if this was a Riddick film the Underverse. You may need reminding that the official Bank of England Bank Rate is 0.1% as you read the numbers below.

Effective rates on interest bearing credit cards fell 14 basis points to 18.4%, whilst effective rates on personal loans fell 7 basis points to 6.8%.

Also the debacle at the Financial Conduct Authority which saw many overdraft rates double to around 40% is slowly being picked up in the data. Someone at the Bank of England must be torturing the series to keep the rate as low as 24% and please Governor Bailey who of course presided over the FCA at the time.

A decade after the credit crunch hit UK banks have made so little progress

This week has opened with an outbreak of cognitive dissonance in my home country the UK. It opens with a worthy enough spirit and principle from the Treasury Select Committee of HM Parliament.

Regulators must act to reduce unacceptable number of IT failures in financial services sector, warns Treasury Committee.

There is an obvious flaw in the “Regulators must act” opening as we so often see examples of them being fast asleep although of course the official term for this is “vigilance.” Indeed I note that in the comments section last week the issue of regulatory capture had arisen again which for newer readers is where an industry infiltrates and takes control of its regulator. It does not have to be an industry as we see how HM Treasury alumni are every single Deputy Governor at the Bank of England which is officially “independent” of er the Treasury…..

Moving back to the issue at hand the TSC summarised it here.

The Treasury Committee launched its IT failures in the financial services sector inquiry on 23 November 2018. It followed a series of high-profile service disruptions within the financial services sector, most notably the TSB IT migration in 2018. Issues following the migration caused significant disruption to customers for a prolonged period of time, and we have an ongoing inquiry into Service Disruption at TSB1. There have also been many
other incidents, including those at Visa and Barclays.

They do not say it but the prolonged failure at TSB was especially embarrassing as it was supposed to be a new bank but in reality was a bureaucratic exercise exhuming it out of the bloated Lloyds Banking Group. So it turned out to have all the same and maybe worse problems than the other banks as its IT meltdown showed.

It was far from just being the TSB though.

IT failures, or incidents (used interchangeably), within the financial services sector appear to be becoming more common. Over the past 18 months there have been major
incidents at TSB and Visa, along with a litany of incidents at other firms. This increasing trend is recognised by the FCA, which stated in 2018 that “outages in the financial services sector are becoming more frequent and publicised” and that “the number of incidents reported to the FCA has increased by 187 per cent in the past year”.

This matters more these days as we switch to banking online.

Research by UK Finance found that 71 per cent of UK adults used online banking in 2017, and that this trend has been increasing. At the same time, the number of high-street
bank branches has been falling, with a 17 per cent reduction in the number of branches between 2012 and 2018.

The Problem

The real issue here is the fact that the UK establishment have been happy to use taxpayer’s money and the policies of the Bank of England to provide a put option for banks and their management. The subsequent zombified banking sector has no great incentive to improve its IT which was so bad when the credit crunch hit that the Bank of England felt it could not cut interest-rates below 0.5%. This was because the creaking IT infrastructure could not handle 0% let alone negative interest-rates. When this did happen at the Cheltenham and Gloucester which was part of Lloyds Banking Group the work around was that the capital owed was reduced to save a 2001 A Space Odyssey HAL 9000 style moment from happening.

Next comes the idea of the Regulator acting quickly and decisively as Citywire points out.

Calls for the Financial Conduct Authority to offer ‘stronger and faster intervention’ are at least partially ‘justified’ the regulator’s chief executive Andrew Bailey has admitted.

There was this issue.

At the beginning of the year mini-bond manufacturer London Capital & Finance went bust after the FCA ordered it to freeze its accounts, following what appeared to be many years or warnings about the business.

Which led to this bit.

It remains unclear how the firm was able to promote unregulated mini-bonds via regulated Sipp and ISA wrappers for many years.

Sometimes it is so bad it is funny.

It also faced much ridicule after banning former Co-operative Bank chair and church minister Paul Flowers in 2018, five years after the organisation collapsed and the tabloids dubbed him  the crystal Methodist due to his drug use.

More recently this has hit the headlines.

The shuttering last week of Woodford Investment Management after a series of big bets went sour and put it in breach of FCA rules on liquidity limits will be freshest in the mind.

Also in a rather familiar fashion the regulator seems to have overlooked this.

Former star fund manager Neil Woodford and his business partner reaped close to £20m in dividends in the last financial year amid a crisis at their investment house, according to an FT analysis ( Financial Times )

HSBC

The story here was supposed to be an HSBC boom driven by its involvement in the Far East. You may well recall its regular hints of its head office leaving the UK when it wants to put pressure on the UK government. Of course being a major bank in Hong Kong is not quite what it was so let me hand you over to the South China Morning Post.

HSBC, one of three lenders authorised to issue currency in Hong Kong, said on Monday that its third-quarter profit fell 24 per cent as it reported weaker results in its retail banking and global markets businesses.

The bank said its business in the city remained “resilient” despite a weakened business climate in its largest market, as months of protests and civil unrest have sent the city’s economy into a “technical recession”.

“Resilient” eh? I did not realise that things were quite that bad! The share price is down over 4% today at £5.90 and whilst HSBC has done better than other banks until now the future does not look quite as bright.

Barclays and RBS

From CNBC.

The British lender posted £292 million in net loss attributable to shareholders for the three-month period ending Sept 30. Data from Reuters’ Eikon predicted a loss of a £19.2 million for the quarter. Barclays had posted a £1 billion net profit in the same period last year.

The shares have risen due to rising Brexit hopes recently but £1.70 is still very poor.

From City-AM.

RBS reports an operating loss of £8m for the nine months to the end of September 2019, falling from £961m in the same period last year.

A challenging quarter in the NatWest Markets division, where total income plunged by £419m to £150m in the wake of flattening yield curves, also dragged down the bank.

This leads to this response.

The mis-selling and other charges overshadowed underlying progress at the bank

Oh no sorry. That was from November 2nd 2012 on here!

Metro Bank

I hardly know where to start with this one, so let me point out that the £8 share price of this summer has been replaced by one of £2

Comment

The fundamental issue here is that we are now more than a decade away from the credit crunch. The major flaw in bailing out the banks was that they then had no incentive to change. Even worse that we would repeat the mistakes of Japan and end up with a zombified banking structure. If we look at the world of IT we see the Bank of England confirming it here.

The TFS was designed to reinforce pass-through of a cut in Bank Rate from 0.5% to 0.25% and in doing so
reduce the effective lower bound in the UK…….The existence of the TFS meant that the MPC reduced its estimate of the effective lower bound from 0.5% to
close to, but a little above, 0%. ( Governor Carney June 18th )

So in spite of a sweetener of £116.7 billion the banks still cannot cope with 0% interest-rates. Ironically they may be doing us a favour of course.

Next comes the way that PPI has been a type of Helicopter Money QE for the UK economy and here we get on a rather dark road. That a quid pro quo for the banking scandals and bonuses as well as the put option for bank survival is that they put some of the money in the hands of the UK consumer.

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