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
Citi analysts have read 38 European banks’ annual reports for last year.
People who value their sanity are not supposed to do that. (HSBC’s 2013 report, all 590 pages of it, is pictured below.) So it’s interesting to note what Citi found. Read more
Given the repeated hints from across the pond that BNP Paribas is going to get clobbered with a $10bn fine by the US authorities for alleged sanction busting, etc, we should not be too surprised that the European banks team at Credit Suisse has almost doubled its estimate of continent-wide litigation costs. The CS base case has been hiked from the $58bn guessed at in February last year to $104bn now.
To put that number in context, $104bn is roughly half the losses registered during the subprime crisis. And CS reckons some $39bn has yet to be provided for, so litigation risk is inevitably going to be a drag on growth and capital return for the foreseeable…
We’ll share the CS charts below, but first a quick glance at the main areas of potential pain: Read more
Introducing a new series tracking the slow death of the traditional investment banking model (if not banking itself).
Just to round up the recent spate of gawd awful Q1 results from the banking sector: Read more
Some expansive credit-related thoughts arrive from Alberto Gallo at RBS, for a quiet May Day when Europe’s capitalists take the day off in honour of its workers.
In short, its the safe stuff that may not be safe anymore as/if/when the continent’s economy expands: Read more
We’ve been harping on about the rise and importance of the central execution desk and internalisation practices more generally for a long while.
But we haven’t touched the topic recently because, well, banks and concerned parties tend not to enjoy discussing it very much. Read more
That’s banks’ exposure to Russia by major economy, put together using BIS data by Gilles Moec and team at Deutsche. Click the image to enlarge. Read more
Alternate title: the market isn’t entirely nuts, when’s the crash?
While tech titans and buyers of initial public offerings dream of a wondrous future, bank investors appear to be saying something very different.
Here’s the FT’s Tom Braithwaite and co, recently foreshadowing the US bank earnings season:
Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month.
After six years in the red (the latest an £8.2bn loss for 2013) the only way is up and this bank is on it:
Today RBS is announcing a new plan with the ambition of building a bank that earns its customers’ trust by serving them better than any other bank.
And here is Ross McEwan rallying clearly delighted staff with that message.
Picture a kangaroo in a sauna, its pouch stuffed with cash. The Aussie banks are where you go for bank dividends, paying out practically all their earnings in durable swimable plastic cash.
But Citi would like to draw your attention North: Read more
Wondering where next to focus attention after the emerging market carnage? Citi has a bank chart for you:
Are you sitting comfortably? Too comfortably, perhaps?
Huw van Steenis isn’t. He’s come back from Davos with the feeling that while banks have got ahead of europe-wide stress tests by raising capital (€25bn, in fact, he calculates) he is far from relaxed about the consequences of the Asset Quality Review. Read more
In our previous post we argued that one of the reasons QE may have failed to perform as expected, especially when it comes to stimulating price levels and employment, is because the modern monetary system isn’t what many believe it to be. Or at the very least, money doesn’t work exactly the way many economists and analysts believe it does.
As Tyler Cowen noted on Tuesday:
Milton Friedman, some time ago, wrote that money was for the most part neutral, and that the new money rapidly mixes in with the old. That made sense to me at the time, and it nudged me away from Austrian views, yet we have seen decidedly non-neutral effects from the various QEs and the periodic taper talk.
“We haven’t forgotten who keeps us in business,” reads the slogan on the website of Zions Bancorp, Utah’s biggest bank. Read more
Another good snippet from the BIS quarterly review that’s worth highlighting comes in the observation that banks are losing their raison d’etre due to the erosion of their funding advantages versus non-banks. Which means they’re increasingly resembling listless entities devoid of purpose in a capital shadowland that’s not willing to let them move onto another more deathly plane.
From the survey (our emphasis):
The erosion of banks’ funding advantage limits their effectiveness as intermediaries. There are indications that euro area banks, for instance, passed on some of their relatively high borrowing costs. The average interest rate on euro area bank loans stalled at levels above 3% over the past three years, in spite of falling policy rates. As the cost of funding in bond markets trended downwards, large corporates increasingly faced incentives to bypass banks and tap markets directly (Graph 6, left-hand panel).
A useful chart from Citi on Thursday morning (which you may click to enlarge), on the recent rise in bank holdings of sovereign debt. Read more
What does this mean?
Seriously — what does it mean?
It’s an analyst’s take on Lloyds Banking Group’s latest profits update, whatever it was that actually constituted profits here. Beyond that you’re on your own: Read more
Friday bank chart time, and as we like ambiguous messages, lets look at debt issuance by the Giips — banks across Greece, Italy, Ireland, Portugal and Spain.
The good news is that it is up a lot so far this year, $7bn or a hefty 16 per cent rise on the same period last year. Whooo.
The bad news is that it is still down a lot compared to, say, the same period in any of the preceding six years. Hoooo dear. Read more
We don’t know exactly what next year’s Asset Quality Review will involve yet, but we are starting to get a picture of what investors think about the ECB’s forthcoming burrow through bank balance sheets.
In short, given that it might not be all over until the end 0f 2014, everyone is feeling pretty good about the banks right now, and that might explain a surge of appreciation for European stocks. Read more
Monte dei Paschi di Siena, Italy’s third largest, oldest, most loved and, ahem, only moderately state supported lender revealed its big survival plan on Monday.
More earnings, more capital, buy signals are bound to start flooding in this morning and… oh. Read more
The European asset quality review is on its way! Or at least details of how the ECB plans to run the so-called AQR are due this month. We expect fine tooth combs, desk lamps in faces and penetrating stares.
But, as the Economist explains, it is not a stress test. That would be all about simulating disaster to spot it in advance. Read more
It does not lend money (except rarely), it does not issue or underwrite securities, it does not serve business customers. It does have two sovereigns as customers, but they are regularly confused as one sovereign.
It would like you to know that it does not have any anonymous accounts.
Guess the bank — which has just filed its first ever annual report (for 2012): Read more
“I’d like to be instrumental in the manipulation of key interest rate benchmarks to the benefit of my employer”, said no aspiring financier ever. Equally unimaginable are freshly-minted bankers starting out wide-eyed, bushy-tailed and eager to aggressively mark books in order to disguise losses.
And yet, here we are with a plethora of scandals and misdeeds.
Why do so many in the industry lose their way? Read more
Q. How do you approach a sleeping depositor in a Cypriot bank?
A. Very slowly: Read more
From the FT on Wednesday:
Vince Cable, business secretary, has lifted the lid on tensions between the government and the Bank of England criticising its “capital Taliban” whom he accuses of holding back the recovery by imposing excessive financial burdens on the banks.
He’s angry that the Bank (well, the “jihadist” element, at least) are holding “back small business lending by demanding banks hold onerous levels of capital as a cushion against further shocks.”
We may have to take this blog into list format… Read more
The New York Times ran a big piece on the ongoing commodity shuffle this weekend. The one FT Alphaville (and others) have been writing about for a long while now, and which applies to both metals and energy markets.
The story followed a Reuters article reporting that the Fed was now “reviewing” a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets. It was this, we always noted, that allowed for the emergence of a so-called physical loophole for a number of top Wall Street institutions active in commodity markets. The fact that they were swap dealers with physical exposures ensured they were eligible for exemptions (on such things as position limits) whilst other financial institutions were not. Read more
You’re Jeroen Dijsselbloem.
You expropriate subordinated bondholders of a Dutch bank, SNS Reaal — insisting that the bonds “entirely lose their value, which would also have happened if SNS had gone bankrupt” rather than receive a €3.7bn bailout. It’s a huge precedent for bail-ins. It’s a new order. No reverse-ferreting.
Months later… Read more
The Basel Committee on Banking Supervision is back with another look at risk-weightings — that is, the risk weighting done by banks using their own models rather than the standardised BIS methods.
A new BIS/Basel paper focuses on the banking book, whereas a study published in January looked at the trading book. Read more
Ohhh, who’s being naughty now? Read more
China Everbright Bank placed itself directly in the firing line of terrible puns last week when reports it had defaulted started to circle.
Thankfully, Anne Stevenson-Yang from J Capital read into the news a bit further than most:
The interbank defaults last Thursday provided definitive, if indirect, proof that the cash coming into China is for financial investment and interest arbitrage. It masquerades as a trade surplus but is not. With the tightening of the domestic central bank credit window, Chinese banks are heavily dependent on these inflows for the cash they need to roll over loans. That is why the banks immediately went into distress when regulators decided to clamp down on fraud on the trade account.