Banks in the quake-affected north-east of Japan will soon be able to borrow longer term from a new scheme worth ¥1,000bn ($11.7bn), offering one-year loans at 0.1 per cent.
The scheme comes on top of ¥21,800bn ($265bn) liquidity made available immediately after the quake and a doubling of the Bank’s asset purchase programme from ¥5,000bn to ¥10,000bn ($121bn). Tokyo has also been involved in an internationally co-ordinated effort to prevent the yen appreciating too sharply. So far, though, the BoJ remains unwilling to buy government bonds, a measure adopted in several other countries since the crisis.
In addition to such measures, at today’s meeting, the Bank judged it necessary to introduce a funds-supplying operation that provides financial institutions in disaster areas with longer-term funds in order to support their initial response efforts to meet the future demand for funds for restoration and rebuilding.
The sums involved in propping-up Ireland’s banking system are so great – and the chances so small of them falling dramatically any time soon – it was inevitable the European Central Bank would want to find a better, longer term solution.
Currently, the total amount of ECB liquidity and “emergency liquidity assistance” provided by the Irish central bank, both essentially on an ad-hoc basis, is not far south of €200bn.
Hence news at the weekend that the ECB is looking at some kind of facility for eurozone banks in restructuring is not surprising. We have known for some time that the ECB was looking at ways to deal with “addicted banks” – those totally reliant on its liquidity and unable to fund themselves normally in financial markets. Ireland’s banks clearly fall into that category. 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
The ECB is succeeding in its mission to wean Irish banks off emergency eurozone support – but at a cost. Data from the Irish central bank suggest that support for Ireland’s banking sector rose €18.9bn in the month to February 25 to stand at €70.1bn (red on the chart). ECB support fell €9bn to stand at €116.9bn (blue on the chart). This means that combined assistance rose €10bn to €187bn, a new record. As you can see on the chart, combined assistance (the total height of the bar) dipped in the month to January, but has now risen again, suggesting banks’ needs are growing.
For the Irish central bank, assistance to the banking sector (under “Other assets”) now constitutes more than a third of total assets. Indeed, assistance for banks is approaching half of the country’s GDP. As David Owen, chief European economist at Jeffries points out: “There is a school of thought that this €70bn or so of emergency liquidity is a contingent liability of the Irish state and so should be treated as such. If so, then outstanding Irish government debt-GDP could soon be heading towards 175 per cent. It will be interesting to see what the IMF says on the subject, when it publishes its assessment of the economy and debt dynamics 15 March.” Indeed it will.
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
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’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.
The 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.
To add to the prevailing sense of deja vu, regulators in both the US and Europe are this week discussing new banking stress tests. There is a significant difference with the new tests, however: they are to be part of regular, ongoing scenario analyses, and the results in the US, at least, will remain private. The first round of stress tests were public and aimed at reassurance.
The Federal Reserve is expected to start analysing data provided by 19 large banks this week, to work out how their balance sheets would withstand a variety of new shocks. “Only banks that have repaid government bail-outs and can prove a lifted dividend will not compromise their safety will be allowed to return cash to investors,” write Francesco Guerrera and Tom Braithwaite. “The Fed will also decide whether banks are on course to meet more stringent rules on capital requirements, agreed by the international Basel committee last year.” Tests are expected to be completed by March and are expected to be similar in content to those of May 2009. Read more
Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.
Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down. Read more
Growing divergence between countries’ economic policies is threatening the global recovery, Mario Draghi has said.”The economic recovery is strong in the emerging countries, weak in the United States and uneven in the euro area. The economic policy responses are divergent,” said the Italian central bank governor. As some countries intervene in currency markets and imbalances grow, floating exchange rates are “feeling the gap,” he added, concluding: “The world recovery itself is at risk.”
Mr Draghi, who is a contender to succeed Jean-Claude Trichet as ECB President next year, said the only option is for countries to co-ordinate their economic policies more closely. That co-ordination could include limiting current account imbalances, avoiding protectionist policies, encouraging flexible exchange rates and reducing the volatility of capital inflows to emerging markets. He also indirectly supported calls for semi-automatic sanctions in the eurozone. Read more
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
Mario Draghi, Italy’s central bank governor, has struck a tough tone in an article written for the Financial Times. His target was “systemically important financial institutions” – the largest banks whose collapse would threaten the global economy. Lehman Brothers was the first such institution that was allowed to fail. It was also the last, Mr Draghi pointed out. “The public will not, and should not, accept more such bail-outs.” Regulators had also to turn their attention on the “shadow banking sector” hitherto beyond their reach.
His comments will have been noted carefully by colleagues on the governing council of the European Central Bank, which is meeting in Frankfurt on Thursday for its regular monthly non-interest rate decision meeting. Mr Draghi is a possible candidate to succeed Jean-Claude Trichet when the ECB president’s eight-year non-renewable term expires in October 2011 (another is Axel Weber, Germany’s Bundesbank president).
Mr Draghi, who chairs the global Financial Stability Board, has kept a low profile on ECB monetary policy issues. But his call for a tougher regime to deal with wayward banks underlines his “hawkish” credentials. Read more
Further jitters at the eurozone periphery today with Irish, Spanish and Greek sovereign yields higher, and news that Spanish banks tapped the ECB for €140bn during July.
Of particular interest, demand for Italian bonds dropped significantly. This matters because European banks are exposed very heavily to Italian sovereign debt – the top 91 banks own €100bn of the stuff in their trading books. This is quadruple the trading holdings of Spanish debt, and 22 times holdings of Irish debt. Indeed, Italian debt is held in the trading books of Europe’s banks more than any other European sovereign – even German-issued debt totals just $70bn.
Italian banks Intesa and Unicredit carry the greatest trading exposure to Italy, as we would expect. After that come Deutsche Bank and Credit Agricole, each with about €10bn. See the data, split by bank, below: Read more
The Dutch finance minister Jan Kees de Jager has called on the Dutch National Bank to formulate a remedial plan within the month, after a commission found their internal supervision wanting.
Investigating the bankruptcy of small Dutch bank, DSB, the Scheltema commission concluded that the DNB should never have issued them a banking licence in 2005. While the financial position of the bank was sound, the report concluded that fundamental improvements in corporate structure had been needed and should have been identified. (DNB aside, the 348-page report blamed unprofessional management and poor governance for DSB’s collapse.)
Responding to the commission’s report, Mr de Jager said: “The internal supervision within DNB needs to be changed, for instance via the supervisory board … the supervisory board needs to exercise more control of DNB’s supervisory tasks. The law needs to be changed and I will change the law.” Read more
Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.
On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “We are fighting them every day on this. It’s absurd.” Read more
£2bn, €1bn… and $19bn. Proposed bank levies so far from the UK, France and US. The tide of ever smaller bank levies appears to be turning.
American banks with assets exceeding $50bn and hedge funds with assets over $10bn would be liable to pay the costs associated with financial reform. This from a proposal by Barney Frank late last night during discussions to finalise Wall Street reform. More on ft.com.
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
Sir John Vickers has just been confirmed as head of the Independent Banking Commission
Sir John Vickers is warden of All Souls College, Oxford University, but has long been a core member of the British economic establishment. Until recently he was president of the of the Royal Economics Society and rare among economists in having held jobs in supervising both overall economic policy, as chief economist of the Bank of England, and detailed regulation and promotion of competition in individual industries, as chairman of the Office of Fair Trading.
His initial reputation was made in his analysis of privatisation in the 1980s, in which he argued that competition and effective regulation was generally more important than ownership in seeking to improve the efficiency of companies. Read more