10/10/2013: IMF's GFSR October 2013: More Focus on Banks

Now, back to GFSR and banks. I covered some of the IMF findings on banks here: http://www.fergco.co/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html

This time, let's take a look at what IMF unearthed on funding side of the banking systems. Fasten your seat belts, euro area folks…

Euro area banks have shallower deposits base than US banks… but, wait… euro area banks are supposedly 'universal' model, so supposed to have MORE deposits, than the originate and distribute model of the US banks… Oops… Euro area banks like holding banks deposits - just so contagion gets a bit more contagious. Euro area banks hold tiny proportion of equity, lower than that of the US banks.

By all means, this is a picture of weaker euro area banks than US banks - something I noted here: http://www.fergco.co/2013/10/9102013-leveraged-and-sick-euro-area.html

Another chart, more bumpy road for euro area:

Per above, there is a massive problem on funding side for euro area banks in the form of huge reliance on debt (both secured and unsecured). The US banks are much less reliant on secured debt (they can issue real paper and raise securitised funding) and they rely less overall on borrowing.

Chart below shows the structure of secured bank debt. Euro area again stand out with huge reliance on covered bonds. US stands out in terms of its continued reliance on MBS. The crisis focal point of the latter did not go away… and the crisis focal source of contagion - banks debt funding - has not gone from euro area's 'reformed' banks.

Happy times... Mr Draghi today expressed his conviction that euro area banks have been cured from their ills... right... hopium-783 is the toast of Frankfurt.

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10/10/2013: IMF's GFSR October 2013: Focus on Banks

As promised in the earlier post, focusing on Corporate Debt Overhang (http://www.fergco.co/2013/10/10102013-imfs-gfsr-october-2013-focus.html), I am covering in a series of posts the latest IMF GFSR.

Let's take a look at the banking sector focus within the GFSR:

Note the relatively healthy position of the euro area banks on the basis of Tier 1 capital ratios. However, when it comes to leverage, the chart below shows a ratio of tangible equity to tangible assets (the so-called Tangible Leverage ratio). The higher the number in the first chart above, the lower is the capital ratio ('bad thing'), the higher the number is in the chart below, the higher is the ratio of equity to assets ('good thing'):

So euro area banks are doing fine by Tier 1 capital, but are not fine by leverage... As the rest of the IMF analysis highlights, much of this aberrational result arises from the nature of the euro area banking model (assets-heavy 'universal banking' model), plus, as IMF politely puts:

"The conflicting signals also highlight the  importance of restoring investor confidence in the accuracy and consistency of bank risk weights. This also suggests that risk-weighted capital ratios should be supplemented by leverage ratios, as proposed in the Basel III framework."

No comment on the above...

GFSR is deadly on profitability of banks and equity valuations. Here's the key chart:

Notice the concentration of euro area banks at the bottom of the distribution. Still think Irish banks shares held by the Exchequer are worth EUR11 billion?.. really?.. By the chart above, they should be valued at around 2-3% of their tangible assets... which would be what? Close to EUR6 billion, maybe EUR9 billion. Which refers to all Irish banks. Listed, unlisted, foreign, domestic... And to all their equity... not just the equity held by the Exchequer.

Never mind. Like Irish banks, euro area banks are going to continue dumping assets... err... deleverage...

"European banks have been deleveraging in response to market and regulatory concerns about capital levels, and may continue to do so. ...a combination of market and regulatory
concerns about bank capitalization has already led to an increase in capital levels at EU banks. …Over the period 2011:Q3–2013:Q2, large EU banks reduced their assets by a total of $2.5 trillion on a gross basis — which includes only those banks that cut back assets — and by $2.1 trillion on a net basis."

So you thought it was surprising/unusual/unexpected that the banks are not lending? Every policymaker harping on about banks credit 'growth' should have known this deleveraging is ongoing and with it, no new credit growth will occur… I mean USD2.5 trillion!

"…About 40 percent of the reduction by the banks in the EU as a whole was through a cutback in loans, with the remainder through scaling back noncore exposures and sales of some parts of their businesses… As discussed in the April 2013 GFSR, banks have been concentrating on derisking their balance sheets by reducing capital-intensive businesses, holding greater proportions of assets with lower risk weights (such as government bonds), and optimizing risk-weight models."

Put differently, to beef up capital ratios, the banks shed primarily riskier loans. Now what these might be? Oh, yes, SMEs and non-financial corporate loans in general… So that 'credit growth' to SMEs?..

"The capital ratio projection exercise previously discussed suggests that some banks will need to continue raising equity or cutting back balance sheets as they endeavor to repair and strengthen their balance sheets."

Read my lips: no new credit growth… QED…

You can read the entire GFSR here: http://www.imf.org/External/Pubs/FT/GFSR/2013/02/pdf/text.pdf

Note: my recent article on European banks is here: http://www.fergco.co/2013/10/9102013-leveraged-and-sick-euro-area.html

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15/9/2013: BIS Quarterly: a tale of two banking systems

Two hugely revealing charts from the BIS Quarterly Review, September 2013 (http://www.bis.org/publ/qtrpdf/r_qt1309e.pdf) show exactly the remaining adjustments yet to be undertaken by the banking sector in Europe, compared to the US.

Here they are:

 and

 
note how European banks lag US banks in assets deleveraging, and in raising capital, and are slightly lagging in terms of changes in the ratio of risk-weighted assets. In risk-weighted capital ratios, the european banks are about 1/3rd of the way shy of the US, and in terms of capital, roughly 1/2 of the adjustment to the US levels is still required.

And per operational weaknesses of the European banking system? Next we have a table:

Although different across periods, the divergences between the European and US banks are still qualitatively the same for pre-crisis and crisis periods. In particular, US banks operate at higher cost than European ones, but generate more interest income and other income.

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22/8/2013: Burry the Debt... Forever!

Pierre Pâris, Charles Wyplosz, 6 August 2013 column for Vox.eu, titled "To end the Eurozone crisis, bury the debt forever" is a perfect referencing point for my thinking on the debt crisis. Read it here: http://www.voxeu.org/article/end-eurozone-crisis-bury-debt-forever

Synopsis: "The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis".

Can't say it better myself!

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22/8/2013: Why This Time Things Might Be Different...

The readers of this blog know that I am seriously concerned with the issues of private (household) debt sustainability in the Euro area, as well as in other advanced economies around the world. In fact, my (simplified or stylised) POV on the current crisis is that we have now reached the point of long-term saturation with leverage and this is the main driver for the current Great Recession.

In a normal recession, deleveraging by one side of the economy is accommodated by leveraging up in another. For example, in a Keynesian policy set up, deleveraging of the households and non-financial corporates is accommodated by leveraging up of the fiscal side of the GDP equation. In a monetary policy setting, deleveraging of fiscal / public sector side is accommodated by lowering debt costs and thus increasing credit to the private economy. Lastly, in a normal balancesheet recession, both side of the economy can be helped in deleveraging by a combination of two policies accommodation.

In the current Great Recession, neither one of the three approaches above can work, unless at least one approach directly reduces debt levels - either via a sovereign default/writedown or a private sector writedown on a systemic scale. The reasons for this are two-fold:

1. Too much debt on all lines of the economic balancesheet: fiscal, household, NFCs and, thus, banks means that lowering the cost of debt financing is not sufficient to deliver signifcant enough room for new debt expansion; and
2. With emerging markets and middle income economies showing increasingly South-South internalised trade and investment flows patterns, the advanced economies are witnessing structural reductions in the pools of surplus (investable) savings available to them - the effect that is compounded by the adverse demographics in these economies. This means that monetary policy accommodation is funding the liquidity in the financial markets, where normally it would have been going to fund real activity.

In short, debt is the source of the crisis this time around, not the solution to the crisis as in previous recessions. And it is a proverbial perfect storm, as it comes on foot of demographic decline coincident with severe fiscal crises. The resulting squeeze on pensions in the advanced economies and on other age-related public services is yet to come.

Here is an interesting view on the continued crisis dynamics in the area of household debts in the US (with an ample warning for the rest of the advanced world) from Michael Hudson: http://www.alternet.org/economy/big-threat-economy-private-debt-and-interest-owed-it-not-government-debt (H/T to @rszbt Beate Reszat).

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