Category Archives: Banking

UK Bank rate to ‘stay frozen’ for 5 years

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Thanks, Dave, if this is the new mainstream conventional wisdom it looks like the monetarists have somehow gotten back in control.

Their transmission mechanism that increases demand seems to be asset prices and the exchange rate for export growth and reduced imports via higher domestic prices with the implied currency depreciation.

In fact it’s a policy of ‘both feet on the brakes’ which would mean moving towards a Japan like rates environment.

Hard to believe this actually will happen. Very, very odd.


Interest rates in Britain are to stay low for years to compensate for a severe fiscal squeeze on the economy, a report to be published this week says.

The Centre for Economics and Business Research, in its latest UK Prospects, to be published tomorrow, predicts that Bank rate will remain at 0.5% until 2011 and not reach 2% until 2014.

It also expects further quantitative easing by the Bank of England on top of the £175 billion so far announced, and says that the programme of asset sales will not start to be rolled back until 2014 at the earliest.

Its forecast is based on the assumption that an incoming government will announce £100 billion of fiscal tightening, split between £20 billion of tax rises and £80 billion of spending cuts, over the lifetime of the next parliament.

With this fiscal tightening putting a brake on growth, the Bank will be obliged to keep interest rates down, the CEBR argues.

“We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward,” said Doug McWilliams, chief executive of the CEBR and one of the report’s authors. “Our analysis says that this ought to work. If it does so, we are likely to see a re-rating of equities and property, which in turn, should stimulate economic growth after a lag.”

The forecast implies a good outlook for the stock market and house prices, but could put further downward pressure on sterling.

Charles Davis, a senior CEBR economist and co-author of the report, said the main risk was a rise in inflation from higher commodity prices, which could force the Bank’s hand.

Inflation figures this week should show a drop from 1.6% to 1.2%, which City economists expect to be the low point. Higher Vat at the turn of the year is likely to push inflation temporarily above the official target. Unemployment figures will also be released this week.

+ Profit warnings fell to a six-year low in the third quarter, Ernst & Young, the accountant, said. There were 52 warnings from quoted UK companies, a year-on-year drop of 53%, and 17% less than in the second quarter.

Ernst & Young said, however, that the decline did not mean the worst was over. “This dramatic fall is due to a complex mixture of previously withdrawn company guidance, already depressed market expectations and an improving economic outlook that has encouraged companies to look ahead with greater confidence, with the worst of the downturn seemingly past,” said Keith McGregor, restructuring partner at Ernst & Young.

“Nevertheless, confidence should not turn to complacency. The one-off effects of monetary and fiscal stimulus, and inventory rebuilding have put a gloss on current demand that could soon tarnish once this support is withdrawn.”


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Krugman on monetary creation

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Still chasing shadows?

>   
>   (email exchange)
>   
>   On Wed, Oct 7, 2009 at 4:39 PM, Eric wrote:
>   
>   It’s hard to get it more backward than this:
>   

Yes, this is telling:

“The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. ”

>   
>   He is asking good questions but with all the wrong reasoning.
>   

Agreed, thanks — waiting for the first Nobel prize that’s given to someone who actually understands basic monetary operations!


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FDIC fee proposal

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Regarding FDIC fees, the smaller the better, so nice to seem them sort of moving in that direction.

All they do is raise rates as they raise the common cost of funds for banks, and Fed policy is to lower rates.

Be nice to have leadership that understands banking and the monetary system!

From: MICHAEL CLOHERTY

Details on the proposal still rolling in. Two immediate takeaways:
less acute quarter-end dislocations, and definitional problems in LIBOR
likely to remain. There will be no more special assessments– those
assessments were based off of quarter end levels of assets, so banks had
a very strong incentive to squeeze quarter end balance sheets. Regular
fees are based off of quarterly average levels of insured deposits, so
you won’t get the same degree of quarter end window dressing (which
means smaller market dislocations).

In addition, they are talking about relatively moderate increases in
future FDIC fees– a 3bp increase in 2011. Fees will be lower than the
23bps hit after the S&L crisis. That means there will be less of a
shift toward uninsured deposits (overseas deposits) in order to avoid
that fee. Which means activity in eurodollar deposits remains light, so
there is no good benchmark for LIBOR (banks are likely to continue to
look at CP/CD rates when submitting their settings).

There will be a near-term increase in bank financing needs, as banks
need to come up with $45bn to prepay fees. This may create a small
hiccup in the downward trend in CP, as well as some additional bank
issuance in the 2yr to 3yr sector.

Also, a small decline in bill supply over year end– the FDIC will take
the $45bn and buy “nonmarketable treasuries” with it (the same IOUs that
are in the social security trust fund). The Tsy will take the $45bn of
cash and spend it, so they dont need to issue quite as many bills as
they otherwise would have. Note that the payments are due Dec 30.


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M and A

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As anticipated, this will be larger than ever as the only way to be protected as a shareholder is to buy the whole company.

And the general risks to being a minority shareholder will keep prices lower than otherwise.

M&A Is Back—And May Bring Big Opportunities for Investors

By Jeff Cox

Sept. 25 (Bloomberg) — After missing in action for much of this year’s stock rally, mergers and acquisitions are making a big comeback.


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Your thoughts on wall street remaining intact

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A Year Later, Little Change on Wall St.

As previously suggested, wealth is flowing to the top from the bottom as gdp grows some, unemployment climbs, and wages languish:

Despite the predictions last year about pay cuts, those bonuses appear secure. Kian Abouhossein, an analyst at J.P. Morgan in London, predicted this week that eight major American and European banks would pay the 141,000 employees in their investment banking units $77 billion in 2011 — about $543,000 per worker, not far from the 2007 peak — even after minor regulatory changes are adopted.

>   
>    Can the mortgage fraud environment return?
>   

Lenders/investors will be smarter for a while, best guess. But always ripe for the next fraud.


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Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman

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Stiglitz has part of it right, but his misguided concern about ‘who is going to finance the US government’ is disquieting at best.

Stiglitz Says Bank Problems Bigger Than Pre-Lehman

The Federal Reserve faces a “quandary” in ending its
monetary stimulus programs because doing so may drive up the
cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S.
government,” Stiglitz said.


Stiglitz gave the interview before presenting a report to
French President Nicolas Sarkozy that urged world leaders to
drop an obsession for focusing on gross domestic product in
favor of broader measures of prosperity.


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Basel 3 proposals

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This comes down to the questions of:

What are banks?
What is the role of bank capital?
What are the dynamics of capital ratios?

1. What are banks?

Banks are public private partnerships presumably established and maintained for public purpose.

The presumed public purpose is to maintain and service a payments system and to make loans that further public purpose.

With most nations having learned the ugly way that the liability side of banking is not the place for market discipline,
they use a variety of methods to sustain credible deposit insurance.

With, for all practical purposes, unlimited govt. insured funding available, regulation falls on bank assets and capital.

Regulation determines what assets are ‘legal’ and presumably in line with public purpose. Regulators monitor all bank assets for compliance and assurance that bank assets are ‘worthy’ of the government deposit insurance.

2. What is the role of bank capital?

Banks can be government owned or privately owned.

When banks are 100% public institutions, government determines the price of risk, as expressed by the risk premium charged for specific loans.

As public private institutions, private capital is in a first loss position and risk is priced by private sector agents.

The US and most nations have presumably determined public purpose is served by having the private sector price loans.

Hence banks are public private partnerships with private owners investing prescribed quantities of capital.

3. What are the dynamics of capital ratios?

The capital ratios determine the minimum legal percentage of private funds at risk for the legal bank assets.
For example, a 10% capital ration would mean that private capital is providing 10% of the value of the assets as a first loss piece.

Higher capital ratios reduce both the risk and the returns on the private invested capital.

This also alters the banking system’s cost of raising capital, and thereby also alters interest rates charged by banks.

Conclusion

This understanding is not evident at the level of public policy formation, and the results are not encouraging.

The question of public purpose of capital ratios seems for the most part to be limited to the possibility of 100% of the private capital being lost, and the risk to ‘tax payer money.’

I don’t see any discussion of the larger issues of public purpose for which private bank ownership is presumably established.

And I see no need for international cooperation.

As with fiscal policy, the public purpose of each nation is better served dealing with its own insured banks unilaterally.

From GS this morning:

  • Renewed focus on bank Capital ratios – in light of G20 and the statement from Basel committee yesterday. Waiting for a more formal piece from our analysts on this – but essential conclusion from the number of press pieces around today and the Basel statement is that banks, globally, will need to improve the quality and extent of capital ratios. Nothing new in that message – but the momentum towards formalisation of this process gathering pace. Looks likely that we will get a proposal on ‘Basel 3’ by end of year – impact assement early next year and implementation by the end of 2010. Legislation that will a ) force banks to increase capital ratios b ) replace some of the hybrid capital they have raised previously in form of preference shares or subdebt with common equtiy and c ) limit share dividends in good times to increase captial buffers in downturns. Would like to get some details from our equtiy analysts here – for the moment a very mixed set of views on the implications. FT disputes recent positive price action in bank stocks given the size of equtiy issuance that is likely to be needed in medium term as these proposals take shape. Others suggest that the Basel statement has a notable skew towards banks being able to build capital ratios organically over time by limiting dividends and retaining earnings – purposefully ensuring that there is no snap requirement for capital raising once legislation is proposed. Despite this we suspect that two sectors are still vulnerable here a ) banks with high leverage ratios ( i.e european banks with large non retail operations – particularly given IFRS doesn’t net derivative exposures ) b ) those banks with high proportion of hybrid capital ( i.e particuarly those banks with large gvt investment via preference shares )


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Lehman downfall triggered by mix-up

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Yes, the financial system can come apart from time to time for all kinds of reasons.

My point continues to be that it doesn’t need to lead to a system wide drop in output and employment as aggregate demand can readily and immediately be supported with a tax cut (and/or spending increase, depending on your politics).

A full payroll tax holiday and per capita revenue sharing anytime during Q3 08 would have prevented the subsequent fall off in output and rise in unemployment.

And those same initiatives can still be applied to restore same.

Lehman downfall triggered by mix-up between London and Washington

By Larry Elliot and Jill Treanor

Communication breakdown revealed in first-hand accounts of bank collapse

Blame game goes on as G20 ministers prepare for crucial London talks

September 4 (Guardian) — A breakdown in communications at the highest level between the US and the UK led to the shock collapse of the investment bank Lehman Brothers in September last year, a Guardian/Observer investigation has revealed.

The downfall of Lehman, which triggered the biggest banking crisis since the Great Depression, came after a rescue bid by the high street bank Barclays failed to materialise.

In London, the Treasury, the Bank of England and the Financial Services Authority all believed that the US government would step in with a financial guarantee for the troubled Wall Street bank. The tripartite authorities insist that they always made it clear to the Americans that a possible bid from Barclays could go ahead only if sweetened by US money.

But in Washington, the former Treasury secretary Hank Paulson has blamed Lehman’s demise on Alistair Darling’s failure to let Washington know of his misgivings until it was too late. Paulson has told journalists that during a transatlantic phone call the chancellor said he was not prepared to import the American “cancer” into Britain – something Darling strongly denies.

With finance ministers and central bank governors from the G20 countries meeting in London on Saturday, the first-hand accounts of those handling last year’s events underline a rift between London and Washington over who was to blame for the demise of Lehman, which triggered a month of mayhem on the financial markets.

Lehman’s demise sent shock waves around an already fragile financial system and raised fears that any bank, anywhere in the world was vulnerable to collapse. Within three days, HBOS had been rescued by Lloyds TSB. A month later RBS, HBOS and Lloyds were propped up with an unprecedented £37bn of taxpayer funds.

Hector Sants, the chief executive of the Financial Services Authority, said: “I have sympathy for the US authorities given the complexity of the problems they faced that weekend but I do believe it was a mistake to let Lehman’s fail.” As well trying to find a solution for Lehman, the US authorities were also aware that Merrill Lynch was on the brink and that weekend it was taken over by Bank of America.

While admitting the UK authorities had botched Northern Rock a year earlier, Sants said the collapse of Lehman had more dire consequences. “Without the future market shock created by Lehman Brothers’ collapse, RBS may not have failed,” said Sants.

“Was Lehman the cause or was it the manifestation? It was our view that if Lehman had been supported you would not have seen such a dramatic reduction in liquidity.”

Sir John Gieve, deputy governor of the Bank of England last September, said: “It was a catastrophic error. It caused a loss of confidence in the [US] authorities’ ability to handle the financial crisis which really did change things and proved hugely costly.”

The UK tripartite authorities – the FSA, the Bank of England and the Treasury – had expected the US government to stand behind Lehman in the way that it had backed two crucial mortgage lenders the previous week and helped to orchestrate the bailout for Bear Stearns in March.

No explanation has ever been given for the lack of government funds offered in the final weeks of the Bush administration, which had to step in to prop up the insurance company AIG days after Lehman’s demise.

The UK tripartite authorities were concerned about the financial system in the spring of 2007 and asked their American counterparts to participate in a “war game” to prepare for the collapse of a major US bank and develop a response to a financial crisis. However, the war game, which was to have included the UK, Switzerland, the Netherlands and the US, never took place because of a lack of willingness to participate by the US regulatory bodies.


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