Tom Burgis

Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.  

Economic sentiment in Cyprus fell sharply in the month to March, helping the small eurozone nation to keep its unenviable position of second-from-last in the sentiment stakes. (Last is Greece.)

The banking sector probably isn’t helping. In a report last week, ratings agency Moody’s estimated that about €2.7bn would be needed to recapitalise the banks if assumptions made in stress tests materialised. Compare that to the €500m fund announced on Monday by Cyprus bank governor Athanasios Orphanides and your economic sentiment might dip a little, too. Read more

No stress tests for ages, then they all come along at once.

Some banks are set to raise their dividends imminently in the US, once the Fed gives them the green light ahead of detailed stress test results released in secret next month. Another practice put on hold in 2009 – share buybacks – will also be back on the menu for some of the 19 large banks. Only those groups that wanted to increase dividends or share buy-backs, or repay government capital, received a call from the Fed on Friday. Those receiving good news will no doubt act swiftly: any of these activities will presumably be seen as a public badge of honour, in the absence of results publication.

Europe, meanwhile, does intend to publish results. Arguably the target audience for Europe’s stress tests is investors and markets rather than the banks themselves. This might give the unfortunate impression that policymakers are aiming for the appearance of a healthy banking sector rather than the real thing. Read more

Chris Giles

Bank of England governor Mervyn King sparked another firestorm at the weekend with his interview with the Daily Telegraph. Banks and bankers have been licking their wounds after his rather unflattering remarks.

Although it must be noted that very little in the interview was new, the governor’s use of much more colourful language for financial regulation than for monetary policy, suggests he knew and wanted his remarks on banking to make a splash.

For me, there were three interesting elements in the interview. There are a few other issues others reported heavily but are either simple misunderstandings of the governor or willful misreporting of his words. Read more

Ralph Atkins

Something went badly wrong somewhere in the eurozone banking system late on Wednesday evening. Use of the European Central Bank’s emergency overnight “marginal lending” facility jumped to €15.8bn on Thursday, the highest since June 2009, according to data just released.

The facility, which incurs a penal interest rate, is there to get banks out of unexpected difficulties in their daily liquidity management. So a sudden increase is not unusual and the latest spike may simply have been the result of a temporary glitch. But the amount borrowed is impressive, especially considering that June 2009 was still a time of considerable nervousness in financial markets. Read more

India historical interest rate graphicIndia’s Reserve Bank has raised rates to tackle inflation, while extending bank liquidity measures due to expire next week. The repo and reverse repo rates stand 25bp higher at 6.5 and 5.5 per cent, respectively, while easing measures are extended to April 8.

Indian wholesale price inflation historical seriesThe rate rise was prompted by recent price rises. “Inflationary tendencies are clearly visible,” said governor Duvvuri Subbarao in the statement. “Inflation is the dominant concern… the reversal in [its] direction is striking.” The strength of his words make a 25bp rate rise seem insignificant.

But given global inflationary pressures from food and fuel, India’s December figure was not so dramatic. Viewed historically, annual wholesale price rises of 8.4 per cent still fit into the downward trend seen since April of last year, when inflation was running at 11 per cent. It is too early to say whether December’s figure is the start of a sharp increase in inflation – and today’s decision should make that a little less likely.

Despite the tightening measure, the RBI also announced today that it would alter and extend easing measures Read more

In June last year, the Bank of New Zealand issued the country’s first covered bond – securities backed, for example, by mortgage payments. (So the bank, receiving loan payments, in turn issues debt, receiving cash for that and allowing them to lend more.) Seven months later, the central bank has already seen fit to limit issuance of these bonds to 10 per cent of a bank’s total assets.

The practice allows a bank to increase leverage. The popularity of this and similar leveraging techniques in the US and Europe has been blamed for difficulties faced during the credit crisis. Complex interdependencies are created by reselling debt, repackaging it or simply issuing new debt on the basis of cashflow from other debt. Read more

Every two weeks, on average. That’s how often China is introducing some form of tightening at the moment. The People’s Bank has just increased the reserve ratio again, by 50 basis points, or a half of one percentage point. This increases the amount of cash banks have to keep with the central bank, thus reducing the amount available to lend. Our calculations suggest rural and small-medium sized banks will have to keep 15.5 per cent of their deposits with the central bank, while larger banks will need to keep 19 per cent. In October of last year, PBoC introduced a further division between banks, increasing the reserve requirements of the six largest banks temporarily, keeping the ratio of other large financial institutions on hold. If that division has now expired, the ratio for the six largest banks is now also 19 per cent. The move will be effective January 20.

Mopping up liquidity in this way is one tool to combat inflation. Another is to let one’s currency appreciate. Signals have been sent today from a senior central bank official that China will allow further flexibility in the yuan. “Flexibility” is a one-way bet in the markets at the moment, and the State Administration of Foreign Exchange today set the central parity rate of the yuan at 6.5896 against the dollar, a new record.

British banks should stop paying large cash bonuses and dividends in order to increase their ability to resist the threat of a wider and deeper eurozone crisis, the Bank of England demands on Friday in its latest Financial Stability Report.

Officials worry that although banks have improved their ability to absorb losses, the interconnectedness of the European banking system will amplify losses from peripheral economies, such as Greece, Ireland and Portugal. Read more

Robin Harding

The Federal Reserve had to be creative in following Walter Bagehot’s dictum for financial crises: “lend freely, at a high rate, on good collateral”. It is unlikely that Bagehot would have approved of this:

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Ralph Atkins

Tensions in the eurozone banking system are not going away. At least one bank, maybe more, has been borrowing heavily from the European Central Bank’s “marginal lending facility” in recent days – a backstop mechanism for those banks who find themselves suddenly short of funds. Use of the facility, which incurs a penal 1.75 per cent interest rate, has been above €2bn for 11 consecutive days now and this morning rose above €3.6bn.

The level of borrowing is not yet at record levels but, interestingly, use of the facility has been heavier than in early May, when the crisis over eurozone’s public finances was at its most intense – and before the European Union’s bail-out system was put in place. Read more

We have already identified the new rules and tools required for financial stability and should move on to prioritising our options. This was the implicit message in a speech given last night by Mervyn King, as he said we would need several options working together, and proposed a criterion by which to rank them:

The guiding principle of any change should be to ensure that the costs of maturity transformation – the costs of periodic financial crises – fall on those who enjoy the benefits of maturity transformation – the reduced cost of financial intermediation. All proposals should be evaluated by this simple criterion.

There are no silver bullets, says Mr King. Key suggestions – such as a permanent bank levy or limits on leverage – each add something, but are insufficient alone to prevent another crisis. Additional capital requirements, special resolution regimes and contingent capital also get a mention, underscoring the variety and breadth of proposed solutions.

More radical solutions – such as ‘limited purpose’ banking or functional separation – receive a more cautious treatment Read more

Ralph Atkins

The health of eurozone banks faces a fresh test this week when they are due to roll over €225bn in loans, the largest amount at the ECB since early July, when €442bn of one-year loans matured.

The return of liquidity could put upward pressure on market interest rates, while the volumes that are converted into new loans will be an important guide to levels of financial market confidence within Europe’s monetary union. The results could help determine the pace at which the ECB pursues its “exit strategy” to unwind exceptional measures. Read more

States in northern Europe have formed a new group to boost financial stability, the Nordic-Baltic Stability Group. Members – Norway, Sweden, Finland, Estonia, Latvia, Lithuania and Iceland – hail from in and outside the EU, and in and outside the euro.

Banks beware. The memorandum of understanding says members will keep tabs on – and share – information about significant banks, draw up risk assessments in a common template, and share the burden when things go wrong. Faced with cross-border banks and the risks they pose, states are fighting back:

The financial integration between the Nordic and Baltic countries warrants deeper cooperation

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Further losses expected from commercial real estate will continue to pressure the US banking system, the International Monetary Fund has said in its first detailed assessment of the US economy. Delinquent commercial real estate loans in the US are rising, and currently estimated at $60.45bn, or 7.87 per cent.

The Dodd-Frank Act was “an important step forward to address the weaknesses exposed by the global financial crisis,” said the report, issued under the Financial Sector Assessment Program. But stress tests carried out by the IMF noted that “the system would likely remain under pressure due to expected further losses in the commercial real estate sector. And in a scenario in which growth dropped and unemployment remained high, a significant number of U.S. bank holding companies—especially small and medium-sized and regional banks—would need additional capital.” Read more

Irish banks might never be the same. New bank regulation legislation was passed yesterday, 69-65. The bill is now off to the upper house, the Seanad.

The Central Bank Reform Bill would merge the central bank with the regulator, giving the regulator’s consumer information roles to the national consumer agency. The new integrated central bank and regulator would be called the Central Bank Commission. Read more

France is aiming for a bank levy of €300m but ” would really like” €1bn, French finance minister Christine Lagarde has announced. Yikes. George Osborne’s feat — taxing the banks £2bn while reassuring them of a level playing field — seems a little less impressive. Might this put Mr Osborne off considering further bank levies?

Lucky for UK banks, then, that the UK levy is so small. And largely offset by corporation tax gains.

Investor worries over eurozone banks resurfaced on Tuesday after a warning by a European Central Bank governing council member that some faced funding difficulties.

Sector shares were also hit by concern over a credit downgrade for BNP Paribas and a writedown by Crédit Agricole of the value of its Greek unit. The worries increased the cost of buying protection against bond default in the sector. Read more

Two key Democratic senators offered a narrow path for compromise over the weekend after banks pleaded with regulators and clients to help overturn provisions of a financial regulation bill they say will rock markets.

Chris Dodd, Senate banking committee chairman, and Blanche Lincoln, chairman of the agriculture committee, told the Financial Times there was room to negotiate on a proposal that would force banks to spin off their swaps desks. Financial regulation reform is entering its final week in the senate, and there is a frantic lobbying effort to change parts of the bill before Barack Obama, US president, signs it into law and claims his second big legislative victory after healthcare reform. Read more

Israel’s third-largest bank will stop taking shekel deposits from Palestine Islamic Bank and will reconsider relations with other Palestinian banks, for as yet unidentified reasons.

From Reuters: Read more