Banks

”s Summer not Fall.

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Everyone is nervous about Europe.  Me too.  I have no way of knowing how much of this is already priced in the market.  You’d have to say a lot based on the violent reaction in the oil patch, some European markets but  I don’t see any positive outcome from this weekend vote in Greece.  If they vote to  keep the austerity demands in place, brief rally and the market will soon say the economy is just going to at best muddle along and at worse, be right back at the  bread line. On the other hand if they abandon austerity, … Read more

Banks Overwhelmed by Mortgage Refinancing After Job Cuts

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Sept. 2 (Bloomberg) — Mortgage rates near historic lows have sparked a refinancing boom that has U.S. lenders struggling to handle the surge. “There’s just so much volume,” said Kristin Wilson, a senior loan officer in Bloomington, Minnesota, for Fairway Independent Mortgage Corp., who has seen clients seeking lower rates climb to about half of her business from 20 percent a month ago. “We can’t just ramp up by hiring inexperienced people because they don’t know what they’re doing.” The lending logjam extends to the nation’s biggest banks, which fired thousands of mortgage workers after interest rates rose in November … Read more

Banks Lead Greece Recovery

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Greek stocks rallied, with the benchmark ASE Index climbing the most in more than 21 yrs, as EFG Eurobank Ergasias SA (EUROB) and Alpha Bank SA announced a merger. Eurobank and Alpha Bank each rose by the allowed daily limit of 30% after saying they will combine and sell new equity to strengthen their capital in an attempt to weather the debt crisis. Larger rival National Bank of Greece SA (ETE) gained the most on record while Piraeus Bank SA (TPEIR) had the highest advance in almost 18 yrs. The ASE rose 14% to 1,006.59 at the 5 p.m. close … Read more

Global Baking Regulation Update

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Enhancing financial regulation has been a common view between governments since crisis in Y 2008, but debates over implementation details continue, especially since the recent debt crisis has given rise to Double Dip recession danger. Bankers and financial experts have agreed that the Global banking system needs prudent regulation, but how to strike a balance between regulation and financial innovation is Key issue not yet solved.. Dai Peng, an official with Export-import Bank of China, one of China’s policy banks, said at Saturday’s 5th Annual Bankers Forum that increased regulation and financial innovation should receive equal attention in the reform … Read more

‘ U.S. units

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(Reuters) – The Federal Reserve Bank is taking a closer look at the U.S. units of Europe’s biggest banks, concerned that a euro zonedebt crisis could spill into the U.S. banking system, the Wall Street Journal reported. The $2.5 trillion U.S. money market funds industry — which supplies short-term dollar funding to banks — has retreated from the euro zone in recent months, concerned that the continent’s debt crisis is spiraling out of control. That and the drying up of interbank lending has led to a trebling of dollar funding costs for euro zone banks in the last month. One … Read more

Small Firms Hunger for Sales, Not Credit .

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Small-business lending has been in trouble, but is there an explanation beyond the widespread perception that banks are denying credit, and starving small entrepreneurs? Clearly, the financial crisis and recession whacked banks and curtailed lending to small companies. Lending still hasn’t returned to prerecession levels. But here’s an alternative view of the principal cause: A range of observers report that, in many cases, small businesses don’t want loans. Their sales are so weak they can’t justify taking on debt to expand operations. “It’s the sheer lack of expectation that they’re going to grow their company,” says Bernie Kuechler, of Barlow … Read more

Fed Readies Guidance for Banks in Event Aug. 2 Deadline Missed

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July 29 (Bloomberg) — The Federal Reserve is preparing guidance for banks in the event the U.S. debt limit isn’t raised and the Treasury Department runs out of money to pay all of its bills, a government official said. The guidance would cover issues including how payments are made, collateral pledged for loans as well as other supervisory and regulatory matters, said the official, who asked not to be identified because congressional negotiations on the debt limit are still under way. A credit-rating downgrade of U.S. Treasury securities caused by a failure to lift the $14.3 trillion debt ceiling would … Read more

USA Regulators Punish Banks

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US regulators are straining to keep pace as they write more than 200 rules to rein in risk-taking throughout the financial system. A year after the enactment of the Dodd-Frank financial oversight law, regulatory agencies have finalized only a handful of reforms (50) but are expected to pick up the pace during 2-H of the year. Lobbyists and Wall Street executives, as part of their efforts to delay and scale back reforms, are raising pointed questions about whether Dodd-Frank will hamstring the economic recovery. A broad rollback of reforms is not expected, at least in the near-term. Here is a … Read more

The Japan Investor – You Need One Megabank

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If You Buy Japan Recovery, You Need One Megabank May 30, 2011 As outlined last week, global fund managers continue to be constructive about Japanese equities, despite the lackluster movement in Tokyo stocks, the continued strength of JPY/USD since the Tohoku Disaster on March 11, 2011 and the greater-than-expected decline in Japan’s economy. Tokyo Stock Exchange data show no abatement of record net buying of Japanese equities over the past couple of weeks, particularly from North American investors. The bear case against Japan is extensive, well-chronicled and to many, persuasive. But value investors say the macro story obscures the many … Read more

On Systemic Risk

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There are five factors for systemic risk.  Here they are:

  1. Asset size of the institution, including synthetic exposures.
  2. Degree of leverage of the institution, including synthetic exposures.
  3. Asset-Liability mismatch, particularly financing long assets with short liabilities (including derivatives and margin agreements — think of AIG, or mortgage REITs on repo).
  4. Degree to which the institutions owns financial companies equity or debt, or vice-versa, where other financial companies have claims on the institution in question.
  5. Riskiness of the assets owned by the institution in question.

Contributing to the risks include easy monetary policy, which can lead/has led  to the neglect of risk control.  Personally, if I were a regulator of systemic risk, I would throw my effort at companies that fit factors 1 and 2, and analyze them for the other three factors.

Systemic risk is layered levered credit risk. A lent to B, who lent to C, who lent to D, who financed a bunch of bad mortgages.

#5 is underwriting risk

#4 is connectedness risk

#3 is liquidity risk

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Reforming the banks

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I just got back from a very interesting but hectic week in New York and Washington, followed by two days at a conference in Hangzhou.  During my meetings I noticed that much of the discussion, and many of the questions I was asked by both government officials and investors, focused on debt levels and reforms in the Chinese financial system.  I have written a lot about rising debt in China and am glad that analysts and policymakers seem to be spending a lot more time thinking about balance sheet issues.  Every case of rapid, investment-driven growth in the past century, as far as I can make out, has at some point reached a stage in which debt levels rose to unsustainable levels and precipitated either a debt crisis or a long grinding adjustment period.

The reason debt levels always seem to grow unsustainably, I suspect, is that in the initial stages of the growth model much if not all of the investment is economically viable as it pours into building necessary infrastructure whose profits and externalities exceed the cost of the investment.  The result is real growth.  At some point, however, the combination of subsidies, distorted incentives (in which investment benefits accrue to those making the investment while costs are shared broadly through the banking system), and very cheap financing costs leads inexorably to wasted investment and debt rising faster than asset values.  This is when the debt burden begins to rise in an unsustainable way.

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