credit crunch

Eurozone price rises sound alarms at ECB – FT

Libya turmoil crushes risk appetite – FT Read more

Breathtaking research from an ECB paper, stacking up the measures taken and bodies set up by central banks around the world. An invaluable resource – high praise to authors Stéphanie Marie Stolz and Michael Wedow.

For data junkies, see tables on pages: 25, 30, 37 and 58.

Failure to predict change, ignoring the worst-case scenario and assuming certain tasks were someone else’s responsibility are sins at the root of the Irish banking crisis – and they were perpetrated by bankers, central bankers, regulators and politicians alike.

These are themes repeated in a report into the crisis by new central bank governor Patrick Honohan. The report is one of two released yesterday, the other by Klaus Regling and Max Watson. Both are precursors to a statutory investigation.

Mr Honohan says that bank management failed to maintain ‘safe and sound’ practices; that government policies were unduly ‘accommodative and procyclical’; that regulators were ‘deferential’ and unwilling to rock the boat; and, perhaps most significantly, that the central bank and regulator (CBFSAI):

do not appear to have realised – or at least could not bring themselves to acknowledge – before mid-2007 at the very earliest, not only how close the system was to the edge, but also the extent to which the task of pulling it back from the edge fell to the CBFSAI

Some of Mr Honohan’s points seem guilty of ‘confirmation bias’ – they are Read more

Between 2010 and 2014, $1,400bn US commercial real estate loans will reach the end of their terms. Nearly half of them are currently in negative equity – that is, the borrower owes more than the property is worth. And banks are reducing the number of loans in the sector, and have been doing so throughout 2009.

More shocking is that banks and their auditors are typically well aware of the problem, but have not written down the value of property as prices have fallen. Instead they are “extending and pretending” – or “delaying and praying”: holding property values steady and assisting the borrowers where possible. They need to. If banks were accurately to record property values, they would write down assets on their own balance sheets and jeopardise their business (see example to right).

A very thorough report just released from the Congressional Oversight Panel expects many banks to go under when the pretence comes to an end. The report concludes: “There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.”

When a government body admits things are at crisis proportions, you have to take notice. This isn’t journalistic hyperbole. It is hard to overstate the impact of the coming second subprime, hitting, as it will, a very fragile economic recovery.

So, who will be most affected? In a nutshell, banks, and mostly the smaller ones. Read more

Thanks to Big Picture blog, which keeps us posted on the weekly death count in the world of banks. The same data, viewed as a cumulative chart, shows an upward trend in US bank failures. Indeed, for the geeks among you, the bank failures (red line) so closely mirror the exponential trendline (black), the R squared is 0.9948.

That does not mean, of course, that bank failures will continue along their current exponential path. But it does mean they haven’t slowed down in any significant sense – yet.

Ralph Atkins

The ECB’s monthly bulletin takes a disapproving tone as it reviews measures taken to combat the recession, writes Ralph Atkins of the Financial Times Read more

Krishna Guha

I have a good deal of sympathy for Sheila Bair’s idea that secured creditors should take a hit when a financial institution fails. But there are two problems with her proposal. First, it would kill the triparty repo market, where lenders assume secured really means secured. Second, it is not clear to me why we should want a standardised 20 per cent haircut. Better to estimate the haircut in normal bankruptcy and apply that to any special resolution process.

Moreover, it looks to me like the most promising way of getting some effective discipline from bank creditors is to focus on the more junior categories of debt – sub-debt and potentially reverse convertibles (I like the idea of requiring banks to hold debt that converts into equity when certain thresholds are breached).

Ralph Atkins

Until last year, industrial output in Finland was growing noticeably faster than elsewhere in the eurozone – faster even than in Germany. Ralph Atkins of the Financial Times talks to Finnish central bank governor, Erkki Liikanen Read more

This debate is taking place on the FT’s Arena blog:

Four seasons have now passed since the highest-profile casualty of the financial crisis, Lehman Brothers, went under. Since then, all over the world, politicians, regulators and central bankers have focused on what needs changing to prevent another meltdown. Of course, crises come and go. But at the very least have banks learned their lesson? They would argue they are better capitalised than 12 months ago and have exited the nasty products that shot holes in their balance sheets. Banks might also say that the consolidation of the likes of Bear Stearns, Merrill Lynch and HBOS into healthier rivals can only strengthen the sector. The regulatory environment will certainly be tougher. But there are plenty who still worry history might repeat itself. After all, most banks largely look like they did pre-Lehman, albeit with fewer people. They also remain highly leveraged and remuneration still rewards risk. Do you think banks have done enough? Join the debate. Click on commentRead more