8/2/15: Reformed Euro Area Banks... Getting Worse Than 2007 Vintage?..

For all the ECB and EU talk about the need to increase deposits share of banks funding and strengthening the banks balance sheets, the reality is that Euro area banks are

1. Still more reliant on non-deposits finding than their US counterparts; 
2. This reliance on non-deposits funding in Euro area is actually getting bigger, not smaller compared to the pre-crisis levels; and
3. This reliance is facilitated by two factors: slower deleveraging in the banking system in the Euro area, and ECB policy on funding the banks, despite the fact that Euro area banks are operating in demographic environment of older population (with higher share of deposits in their portfolios) than the US system. Note that Japanese system reflects this demographic difference in the 'correct' direction, implying older demographic consistent with lower loans/deposits ratio.

Here's the BIS chart on Banking sector loan-to-deposit and non-core liabilities ratios  showing loan-deposit ratios:

Note: 1)  Weighted average by deposits. 2)  Bank liabilities (excluding equity) minus customer deposits divided by total liabilities. 3) The United States, Japan and Europe (the euro area, the United Kingdom and Switzerland). This ratio measures the degree to which banks finance their assets using non-deposit funding sources.

Source for the chart: http://www.bis.org/statistics/gli/gli_feb15.pdf.

4/12/2013: Did US banks deregulations spur SMEs productivity?

An interesting study via Kauffman Foundation of the effects of banking sector deregulation and competition on SMEs productivity in the US.

Krishnan, Karthik and Nandy, Debarshi K. and Puri, Manju study, titled "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment" (published November 21, 2013 http://ssrn.com/abstract=2358819) assessed "how increased access to financing affects firm productivity" based on a large sample of manufacturing firms from the U.S. The study relied on "a natural experiment following the interstate bank branching deregulations that increased access to bank financing and relate these deregulations to firm level total factor productivity (TFP)."

Core results "indicate that firms' TFP increased subsequent to their states implementing interstate bank branching deregulations and these increases in productivity following the deregulation were long lived."

In addition, "TFP increases following the bank branching deregulations are significantly greater for financially constrained firms. In particular, …we show that firms that are close to but not eligible for financial support from the U.S. Small Business Administration (and are thus more financially constrained) have higher TFP increases after the deregulation than firms that just satisfy eligibility criteria (and are hence less financially constrained)."

Overall, the "results are consistent with the idea that increased access to financing can increase financially constrained firms' access to additional productive projects that they may otherwise not be able to take up. Our results emphasize that availability of financing is important for improving the productivity of existing entrepreneurial and small firms."

By proxy, the results also show that increased presence of banking institutions in the economy does contribute positively to productivity enhancing funding availability for the firms.

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://trueeconomics.blogspot.ie/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://trueeconomics.blogspot.ie/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.

Economics 28/06/2010: G20 to euribor: beware of the central banks

Update: with a slight delay on this blog's timing - Reuters picks up the same thread here.


Another Monday, another set of pear shape stats.

First, we had a farcical conclusion to a farcical meeting of G20. If Pittsburgh summit was a hog wash of disagreements, Toronto summit had a consensus view delivered to us, mere mortals who will pay for G20 policies. This consensus was: G20 leaders called for

• austerity, but not too much (not enough to derail growth, but enough to correct for vast deficits - an impossible task, assuming that public deficit financing has much of stimulating effect in the first place);
• generating economic growth (with no specifics as to how this feat might be achieved);
  
• increased tax intake (to help correct for deficits); and
• no changes to be made to the global trade and savings imbalances.

In other words, G20 decided that it is time to have a 4 course meal without paying for one.

Then , on the heels of these utterly incredible (if not outright incompetent) pronouncements by G20, Bank for International Settlements (BIS) came in with a stern warning to the Governments worldwide to cut their budget deficits "decisively", while raising interest rates. Funny thing, BIS didn't really see any irony in cutting deficits, while raising the overall interest bill on public debt. Talking of Aesopian economics - let's pull the cart North and South, in a hope it might travel West.

In many ways, BIS got a point: “...delaying fiscal policy adjustment would only risk renewed financial volatility, market disruptions and funding stress” said BIS general manager Jaime Caruana. Extremely low real interest rates distort investment decisions. They postpone the recognition of losses by the banks, increase risk-taking in the search for (usually fixed) yield, perpetuating nearly economically reckless financing of sovereigns that cannot get their own finances in order, and encourage excessive levels of borrowing by the banks.

Continued water boarding of the western economies with cheap cash through Quantitative Easing operations by the CBs risks creation of zombie banks and companies with sole purpose in life to suck in liquidity from the markets. Alas, the problem is - shut these zombies down and you have no means for monetizing public debt in many countries, especially in the Eurozone. Boom! Like the main protagonists in Stephen King's movies, governments around the world now need zombies to rush into their disorganized homes before the whole plot of deficit financing blows up in their face.

BIS also warned that many economic experts and central banks are underestimating inflation risks. And this is just fine, assuming you are dealing with short term investment horizons. However, for a Central Bank to ignore the possibility of a restart of global inflation - fueled by the emerging markets growth and later also supported by accelerated inflationary pressures in the advanced economies following the re-flow of liquidity out of the bank vaults into the real economy once writedowns are recognized and banks balancesheets stabilise - is a very dangerous game. inflation, you see, is sticky.

And inflation might be coming. Look no further than the Fed (here) and the US Administration insistence on the need for continued debt-financed stimulus.

Or, look no further than the movements in the interbank lending markets:

So the long term Euribor is up, up and away despite all the Euro area leaders' talk about fiscal solidarity funds and tough austerity measures. Think: why? Either the interbank markets don't believe in Euro area's ability to get its own house in order (which they certainly don't) or they believe that future inflation will be higher (which of course they do)...

Hence, shorter maturities are in an even more pronounced push up:

While dynamically, the trends are deteriorating:
Now, think about the Irish banks (Spanish, Portuguese, Greek - etc) that are on life support of interbank markets and ECB. Can they sustain these credit prices?.. While facing continued writedowns?.. Don't tell I did warn you about these.