Bankers are blaming tensions in the repo world on the increasing cost of renting out their balance sheets.
As we’ve broken down already, leverage and liquidity requirements make it harder than in the past for banks to borrow cheaply to buy (mostly) riskless and lend those same assets on at higher rates than they have to pay to their own creditors.
Which is another way of saying…new guys in the investment scheme don’t get to accrue the same rate of return from new asset purchases the early guys do unless the assets massively outperform, and hence are much more likely to run if and when these assets are priced below par value or start to outperform. Bitcoiners will, of course, know this as “early adopter syndrome”. For everyone else it amounts to the dynamics which drive debt overhang constraints. Read more
$80 oil, $70 oil, $60 oil, $50 oil and counting… If you suspect the structure of the oil market has fundamentally changed, you may be on to something.
There was a time when all you needed to balance oversupply in the oil market was the ability, and the will, to store oil when no-one else wanted to.
That ability, undoubtedly, was linked to capital access. For a bank, it meant being able to pass the cost of storing surplus stock over to commodity-oriented passive investors and institutions happy to fund the exposure. For a trading intermediary, that generally meant having good relations with a bank which could provide the capital and financing to store oil, something the bank would do (for a fee) because of its ability to access institutional capital markets and its reluctance to physically store oil itself. Read more
I hesitate – to say the least – to critique the central argument in French economist’s Thomas Piketty’s new book Capital in the 21st Century. The author, an inequality expert, is distinguished. The work is acclaimed. The book’s empirical detail is already the stuff of legend. And, most damningly, I have not read the text and do not expect to until it is released in English, sometime in March. Read more
David Roche and Bob McKee at Independent Strategy have put out a strongly worded riposte to Larry Summers’ argument that the world may be beset by secular stagnation.
From the note, their main points are: Read more
The Fed’s taper no-show this week resulted in a plethora of commentaries and articles flagging the risks of the world’s collective addiction to QE.
To name a few: 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
What’s to blame for the sluggish pace of jobs growth in the US economic recovery?
Citi economists Nathan Sheets and Robert Sockin have found evidence that the woes of small businesses might have something to do with it. Read more
An interesting debate is popping up regarding the topic of capital expenditure.
Take the latest from Societe Generale’s Andrew Lapthorne and team. They argued on Thursday that the commonly held belief that companies’ capital investing ratios have been falling, whilst hoarded cash pools have been going up, is inaccurate. Read more
Welcome to FT Alphaville’s extraordinarily infrequent podcast… (click through for the podcast link).
Back in October 2011, James Ferguson, banking analyst at Arbuthnot Securities, warned that the EBA’s tough new capital rules could be about to make the eurozone crisis a whole lot worse because the absence of fresh capital meant banks would have no other choice but to contract their assets.
Or as he wrote: Read more
… Singapore’s Oversea-Chinese Banking, according to analysis published by Bloomberg Markets magazine on Monday:
Bank of Ireland won’t bow to the inevitable.
Monday after (stock) market hours statement: Read more
€60bn worth of covered bonds + €70bn of government bonds = €130bn of potential problem assets on the European Central Bank’s balance sheet.
A 1 per cent interest rate increase at a 3 per cent coupon with an average of seven years maturity makes just under a 5.32 per cent loss rate — which is quite a rough (but conservative) estimate by German financial consultant Achim Dübel. Read more
Don’t be too comforted by this chart of US banking industry capital from broker-dealer Keefe, Bruyette & Woods:
From Morgan Stanley’s global banking analysts on Monday morning.
A big positive for US and other strongly capitalized banks and suggests buybacks could be larger and occur sooner than currently expected. Basel 3 capital requirements are in-line with recently lowered expectations and pave the way for capital management in 2011.
China’s four largest banks could face a combined capital shortfall of at least Rmb480bn ($70bn) over the next five years, according to the president of Industrial and Commercial Bank of China. All of China’s largest banks have announced plans in the past month to raise fresh capital to shore up their balance sheets, but these moves fall far short of the five-year needs estimated by Yang Kaisheng, ICBC president, the FT reports.
Your daily dose of structured finance acronymic hindsight available right here, in a TruPS CDO edition.
From Fitch Ratings on February 12: Read more
UK Banks were weaker across the board on Wednesday. What gives?
Here’s one suggestion from Evolution Securities’ Gary Jenkins: Read more
It looks like Austria has one more thing to worry about: The Basel banking reforms.
Part of the Committee’s proposals to `purify’ common equity Tier 1 capital for banks involves excluding minority interests from the regulatory measure. This is not a good thing for many banks — but there seems to be a particular consensus forming that this is an especially `not good thing’ for Austria’s banks. Read more
On Thursday, FT Alphaville wrote of a potential regulatory crackdown on Deferred Tax Assets — tax carry forwards which can make up a proportion of banks’ Tier 1 capital.
DTAs make an especially poor form of capital, since they only apply if banks are making enough money. In times of losses they’re almost completely useless and are simply carried forward until a time when (hopefully) the bank is generating enough to use them. Read more
Ratings agencies aren’t generally known for expressing negative views, but Fitch has really done a number on Chinese banks in its annual review on the sector, currently making headlines around the world.
The basic idea is that while Chinese banks appear largely unscathed from the credit crisis there are things going on beneath the surface of Chinese finances. Read more
The latest Basel proposals for the banking sector were released on Thursday, and they are not going down well.
Here’s a snap summary from the banks team at Credit Suisse: Read more
Who says the IRS isn’t, umm, understanding?
The US tax authority exempted the Citigroup, and some other bailed-out companies, from rules which would otherwise have led to the troubled bank losing $38bn worth of tax credits. Read more
For it is — after much speculation and hand-wringing — here.
And here’s the summary of what the Basel Committee on Banking Supervision, which sets the supervisory standards for many of the world’s banks, is suggesting to strengthen the sector: Read more
Another blow to bankers this week came on Wednesday when the FSA released its third consultation paper on strengthening banks’ capital requirements.
The document is a staggering 360-pages long, exploring the implementation of amendments to the EU’s Capital Requirements Directive (CRD) in detail, but there are a few main points to be picked out. Read more
Flying somewhat under bankers’ radars on Thursday, obfuscated as they are by new bonus taxes, are the maneuverings of the Basel Committee.
The Committee met on Tuesday and Wednesday to discuss a package of potential reforms to the global banking system. Under discussion were issues such as living wills, liquidity buffers, possible leverage ratios (the three `L’s if you like). And if the below story, from Risk.net, is anything to go by it looks like they’ve made some early progress on the draft reform — which is due to be published by the end of January. Read more
Synthetic CLOs — gone for good or simply slumbering the deep sleep of securitisation?
From Asset-Backed Alert: Read more
Big European banks are likely to be forced to cut their balance sheets or use a large proportion of their profits to build up capital, according to a new analysis of a proposed regulatory limit on total bank borrowing. UBS would face the biggest challenge of all the large European investment banks: having to devote 82 per cent of its profits until 2011 to building up capital or trimming its balance sheet by nearly a quarter, the FT said.
There’s a much more substantial test looming on the horizon for CoCos — the new darlings of the bank capital universe.
Yorkshire Building Society announced on Tuesday that it’s set to finalise a deal to take over its loss-making rival Chelsea. Part of the takeover is a plan to exchange the full outstanding principal amount of Chelsea’s subordinated debt for new notes which will be issued by Yorkshire once the merger’s completed. And those new notes will take the form of Contingent Convertibles — the cutely-named CoCo. CoCos are bonds that convert into equity once a certain trigger is breached. In the Yorkshire/Chelsea case, that’s if Yorkshire’s Core Tier 1 capital ratio falls below 5 per cent. Read more