How long has the Italian banking system been in trouble? Seriously? Why has no-one supposedly in charge come up with a proper plan?
Instead, Italian bank stocks ping around, up and down every day, like penny dreadfuls reacting to the latest speculation of a political fix or some sort of blind eye treatment from Brussels. Witness Unicredit — up 14 per cent or so at pixel, having previously fallen by a third over the preceding three weeks as the latest stage of this eight-year-old crisis has intensified:
Italian banks are a problem. Post-Brexit they’re a serious problem.
A full recap of said banking sector and its estimated €200bn of gross non-performing loans would, according to JPM, “require up to €40 billion (less than 2.5% of GDP)”.
Manageable, say JPM again, “given the current Italian fiscal position and sovereign cost of funding.”
Only problem is… Read more
Day two of post-Brexit trading and… bank stocks are being suspended. So not a great start and it’s a sign that whatever market-stabilising powers UK chancellor George Osborne once had have been diminished.
In fairness, though, he’s trying to calm a hurricane that will leave the banking sector stuck in low interest rate purgatory for even longer than expected. As per David Lock and Atul Hanamante at Deutsche Bank, with our emphasis: Read more
Consider this headline from the New York Times last year:
Goldman Sachs Plans to Offer Consumer Loans Online, Adopting Start-Ups’ Tactics
Alongside this one from the Wall Street Journal last week:
Prosper Talks With Goldman, Others to Replace Citigroup on Loan Arrangement
That’s Prosper Marketplace, the online lender whose lunch Goldman Sachs is planning to eat with its own consumer loans product, trying to get the very same investment bank to buy-to-securitise Prosper’s personal loans. Read more
The presentation deck for the €5bn plan to prop up Italy’s weaker lenders has leaked to Economia Il Messaggero. Click to read:
Back when the Basel III regulations were being debated in the wake of the crisis, it was common to hear dire warnings that rules limiting how much banks can borrow would constrict lending and lower real output. Even some who ostensibly support higher equity capital requirements think there are “trade-offs” between a safer financial system and economic growth.
New research from Leonardo Gambacorta and Hyun Song Shin of the Bank for International Settlements suggests this thinking is backwards: “both the macro objective of unlocking bank lending and the supervisory objective of sound banks are better served when bank equity is high.” Read more
Negative central bank interest rates yet rising bank net interest income. Where else but Switzerland?
A qualified defense of negative rates effects on banks’ net interest margins, you say?
Go on then.
From Andrew Garthwaite and team at Credit Suisse… Read more
India’s more than two dozen state-backed banks (aka PSUs) that make up 65-70 per cent of the overall banking system are still struggling, weighed down by a mountain of bad loans. A mountain of bad loans that they have very probably failed to fully recognise.
The Indian government really wants to help, because fixing that problem would help India’s growth rate, but it’s hamstrung by — amongst other things — awkward fiscal math.
What to do?
Well, put the recap below the line, obviously. Read more
What’s another victim of “the current volatile capital markets, particularly impacting European banks”?
Metro Bank, which has cut the offer price in its fundraising round from £24 to £20 a share and dropped its target total from £500m to £400m. Vernon Hill, the challenger bank’s chairman, cited markets when he gave shareholders the bad news on Tuesday evening. Read more
What drove the 2008 banking crisis were fears of capital insolvency.
What seems to be driving the 2016 bank stock sell-off is a re-evaluation of how equity markets account for the book value of financial institutions in a world of NNIM (negative net interest margins) and eurodollar outflows.
But also, we should think, the degree to which NNIM itself is influenced by the sound of a giant vacuum cleaner sucking petrodollars out of the non-US banking system, the commodity-credit feedback loop of hell and the general subpriming of commodities through the repo collateral markets.
To cut a long story short: if we’ve arrived at a point where commodity collateral is no longer considered safe, that’s one less safe asset in the system, and a helluva lot more pressure on the remaining safe assets (government bonds) to protect par value. Read more
Macro Man might just be on to that something here…
That green line heading down and away from the rest (which you shall see more easily after some enlarging via clicking) is the performance of Japan’s banks since the BoJ went negative last week.
One common explanation why Europe had a worse crisis and weaker recovery than America: its companies depend far more on banks for financing than the capital markets.
Those banks have been in perpetually worse shape than US lenders, mostly because of bad decisions from officials in national governments and the European Central Bank.
The critics point hammer home their point with charts like this:
Something doesn’t add up in the world.
And when things don’t add up, you can only really blame the accountants.
Here’s the problem.
As per Gabriel Zucman’s book, The Hidden Wealth of Nations, the world’s financial liabilities are worth about $7.6 trillion more than the world’s financial assets. Roughly $6.1 trillion of these extra liabilities take the form of equity and long-term debt, with the other $1.5 trillion held in low-yielding deposits and money-market funds. Read more
It is a business now, some of these organisations have complexes not quite as big as Google but it is an office facility and people come to work. Instead of coming to work out how to create things for cell phones, they go after banks because that’s where the money is.
That’s from cyber-security expert Clay Calvert, director of Cybersecurity at MetroStar Systems, who we contacted last week to get some insight on the multiple ways banking is turning into a cyber-security story.
Also, we wanted to know the degree to which everything is spiralling out of control for banks because cyber criminals are now organising themselves in the style of more materialistic criminal syndicates before them. It is, experts fear, the beginnings of a new cold war, of Spectre-style proportions. The criminals aren’t lone hackers in basements anymore. They’re highly organised networks, often working out of jurisdictions which are happy to protect them. Read more
Could industry+”tech” be the most annoying portmanteau since Jennifer Lopez combined with Ben Affleck to form Bennifer? We think so.
A quick list of some current entries:
- It’s not biology, pharmaceuticals or science, it’s biotech or healthtech.
- It’s not financial e-commerce anymore, it’s fintech.
- It’s not advertising, it’s adtech.
- It’s not food provision, it’s foodtech.
- It’s not media, it’s mediatech.
We don’t mean to keep banging on about it. But the bad loans in India’s banking system are both a significant barrier to a new, and badly needed, investment cycle getting properly underway — and a source of some hilarious numbers.
From Credit Suisse’s Ashish Gupta on the Reserve Bank of India (the regulator here): Read more
Have a hypothetical on this joyous Ganesh Chaturthi…
Let’s pretend you’re an Indian public sector banker. You and your ilk control about three-quarters of the country’s lending.
You know that stressed loans are an issue: Read more
Bernie Sanders, US Senator and presidential candidate, has introduced legislation to force the biggest banks to break up. It probably won’t pass, but there’s a chance Sanders could still achieve his goal if regulators are assiduous in demanding credible “living wills” — plans systemically important lenders must draw up to show they could be wound down without blowing up the financial system.
When we thought about this piece of the Dodd-Frank Act in the past we were sceptical that, in the heat of the moment, any government would risk an untried plan to impose losses on creditors rather than err on the side of bailouts. Surely the exercise was a waste of time and scarce regulatory resources. But a recent meeting with some senior American financial regulators made us think there could be a deeper logic at work. Read more
Deutsche Bank has long been an unloved stock.
Not only does it trade stubbornly below book-value, a bleak revenue outlook in January led to the promise of a major strategy rethink for the group, including the prospect of job cuts, asset sales and the streamlining of investment banking divisions.
Among options on the table is a sale of the group’s Postbank retail business — a division it acquired in 2008 in the hope of bringing deposit funding to the aid of its investment banking arm. Read more
Here’s a comment to note in the Bank of England’s “fundamental change” section of its One Bank Research Agenda discussion paper:
Technology is potentially transforming the landscape for money and banking. New digital or e-monies and new methods of payment and financial intermediation raise fundamental questions for financial regulation, money demand generally and central bank money in particular. For example, might central banks issue digital currencies and what would be the impact on existing payment and settlement systems? Is the cryptographic technology behind Bitcoin transformational? How will financial regulation need to adapt if new non-bank credit intermediaries emerge in scale?
Talk of official digital money, of course, is not new to FT Alphaville readers. Nor, for that matter is talk of collaborative non-bank credit unions that mint their own currencies for their own network use. Or even talk of digital money solutions that open up the central bank’s balance sheet to more people in a way that eases the safe-asset shortage. Read more
This from Dan Davies is worth a bit of your time — supposedly four minutes of your time according to Medium’s time-thingy.
It makes the very good point that the lack of Greece-dominated headlines over the weekend is most probably good news. As Dan says, we haven’t had stories of deposit flight and bank runs, there haven’t been anymore leaked documents, the ECB hasn’t piled on any more pressure and there has been no grandstanding of note — from Greek or German politicians.
From Davies: Read more
So, this weekend, the Bank for International Settlements released a preview of an upcoming report in which they make a connection between financialisation and the oil market.
Tracy’s written it up here.
But, before you get too excited, two things must be pointed out.
The first, of course, is that a BIS admission about financialisation effects on the oil market is pretty unexpected.
You see, as far as we’ve tracked or heard from BIS economists on this matter, they’ve resisted arguments and models pointing to financialisation effects, embracing instead explanations that link price effects to fundamentals.
Which brings us to the second thing. Yes, the BIS is shifting its view on the financialisation argument, but the paper also shows it doing so in a really convoluted and unconvincing way. Definitely the opposite of Occam’s Razor. Read more
The FT’s Gillian Tett reports from Davos that the Powers that Be may finally have noticed how — while they were busy regulating the banks — the technology companies quietly moved into what was once their unregulated turf.
Via Wednesday’s Davos dispatch:
Large technology companies will experience the same collapse in reputation as banks have endured in recent years unless they rapidly change their policy approach, business leaders cautioned in Davos. Their warning was directed at the influential heads of technology companies, such as the Silicon Valley giants, who were told they needed to recognise that self-regulation will not be sufficient to stave off mounting public alarm about issues such as privacy.
“Self-regulation, no matter what you do, is just not going to be good enough [for tech companies],” said Paul Achleitner, chairman of the supervisory board of Deutsche Bank. He pointed out that a self-regulatory approach had been previously employed by banks — but notably failed to quell a political backlash against their over-reach.
Fascinating what a few months of sub $90 per barrel oil prices can do to the dialogue about the respective merits of cheap energy.
So, whilst three months ago it was all about “trillions in stimulus from cheap oil!!“, today it’s “$50 oil changes everything!” and ARGHH “energy defaults may be the new subprime!”.
As FT Alphaville warned at the start of December:
If it is true that the commodity ecosystem is collapsing, then it is also true that all dependent industries are at risk. On that basis, those analysts who say that low prices will be a boon for many western economies that depend on oil imports, all miss that none of this necessarily guarantees increased demand.
Margins may be temporarily improved for intermediaries, manufacturers and retailers, but if we end up heading towards a price war on all fronts, all we get is a deflationary spiral that threatens contracts, salaries and debt.
The results of the ECB’s Asset Quality Review are in. As ever it was the taking part that counted, we’re all winners here. Were you minded to look for losers, however, here’s the FT:
Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector.
Nine Italian lenders fell short, out of 25 banks mainly in Europe’s periphery and Germany that need more capital following the stress tests. The general reaction, however, seems to be that the whole exercise is credible, without unpleasant surprises, and that we really need to talk about lending. Read more
Buried in the Reserve Bank of Australia’s most recent Financial Stability Review is a discussion of how Australian banks have heroically managed their costs over the past two decades.
The lessons could be useful to banks in the US and Europe, which are currently caught between regulators who (rightly) want lenders to stop threatening the financial system with excessive leverage and shareholders who yearn for a decent return on equity. Read more
The self-described data geeks at Citi have a new note on who buys euro-denominated bonds, and we want to share some highlights.
Even though European banks were endangered by their significant holdings of sovereign debt, their portfolios were relatively less exposed compared to pensions, insurers, and foreigners. Read more
Close your eyes, lay back and imagine yourself as a regulator at the US Securities and Exchange Commission (do we have to? -ed). Read more
Iren Levina, economics lecturer at Kingston University, brings to our attention a fascinating, if under-appreciated, phenomenon in finance.
She describes this as the “puzzling rise in financial profits and the role of capital gain-like revenues” throughout most of the 2000s, which were totally delinked from real economic growth during the period.
Okay. Why so puzzling you ask? Don’t we know these profits were the result of too much risk taking? And haven’t there been hundreds of papers about this sort of thing?
Well, yes. But this isn’t quite Levina’s argument.
In a paper published in April this year she instead argues that the reason financial profits became disassociated from real economic growth was because of the way they were formed and the way they were transferred through the financial system consequently.
More to the point, because they were enabled by the very phenomenon of “capital gain-like revenues’.
Unfortunately, the monetary assets which facilitated these revenues have been incorrectly understood by the financial system. In Levina’s eyes they are not, as many believe, borrower liabilities matched by real assets at financial institutions, but rather borrower liabilities matched by something altogether different. Read more