Credit deflation and the reflation cycle to come (part 3)

[Castlevania]

4 hours ago, DurhamBorn said:

Depends on the banks and where their loans sit.Residential loan books can be 60% LTV average.Rates going up make a massive difference here because at 5% the banks can swallow a lot of defaults before they go under due to profits.Main victims will be people losing their equity i think.There will be lots of dislocation ahead thats certain.Key is to keep to the de-complex areas mostly.

These Private Equity loans could be where most danger sits,so anyone lending to them will be in trouble of course.

 

The problem is the credit markets. The Central Banks are totally scared of price discovery, and markets doing their thing because a number of companies would default and cause the entire lending market to seize up. The rounds of QE have been to save the credit markets.

A related problem is that banking book accounting is subjective and backward looking - you invariably only take provisions and write downs when things are already very bad. The derivative books by contrast are all marked to market on a daily basis, there’s no hiding. The focus since the financial crisis has been on the derivative side - nowadays a large amount of trades are routed through CCP’s such as LCH and Euronext; banks actively price in the counterparty risk of their clients and have trading desks that simply price and actively hedge this risk; and most derivatives are collateralised. 

I’m very wary of some of the lending books on banks balance sheets.

[stoobs]

11 minutes ago, spygirl said:

CB create the money  at the banks request.

Moneys is destroyed by IR and paying back the debt.

The big booms in UKHPI were both down to gormless fuckwittery which inflated banks liabilities with no repayment -

Endowment mortgages 1985-1995ish.

IO mortgages 2002-2008.

 

Heres a nice chart, which puts the changes in an easy to see chart

https://ourworldindata.org/grapher/leverage-ratio-of-banks-in-the-uk-and-us-19602018

Bank leverage has gone back to where it was pre 1984.

 

BoE explainer from 2014:

Money creation in the modern economy

Quote

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.

Quote

Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation.(6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Commercial banks create money, in the form of bank deposits, by making new loans.

 

[Castlevania]

To add, I prefer the U.K. banks to the European ones. Not that I’d buy any of them. I still haven’t worked out whether the Northern European banks are hedging the interest rate risk on the 30 year fixed term mortgages at fuck all interest that they’ve been writing. I have a feeling that it’s a no.

[JMD]

6 hours ago, DurhamBorn said:

My roadmap is still showing that inflation (and fiscal drag) will do most of the damage.The government has over 50% scrounging from the others now so they wont roll back the state yet.However we will now enter the stage where parts of the state take from each other and fight for the resources.Although the UK population do have pensions,a lot is still in DB.Most of the general population have wealth in housing,so given how far the band is stretched housing will take a lot of the wealth destruction (inflation adjusted).I still think those 60/40 type pensions will also take a lot of pain even more so with fees and in drawdown.

I think you will find more and more people living together to cut down on bills as well.

When i was growing up i knew a lot of people who owned individual shares.Now i only know people in my family.Very few have assets that create an income outside of property.Bennies and BTL.

This thread is really about the fact we were facing (and are now in) a distribution cycle.

 

 

Yes I think(hope?) your model is correct DB, in terms of inflation doing the most damage. After all it makes sense to me that governments, amongst the looming incoming financial chaos, and the fighting for resources that you mention will happen - won't simply be looking to rob everyone blind, instead government will also be (trying to be clever and) seeking to provide some 'getouts' for some in society - firstly their long term friends of course, but also those types of people with the foresight to take advantage. That imho is the true value of this thread, to highlight such areas of foresight/discussion, and to provide inspiration and ideas for some of those potential 'getouts', such as buying inflation loving shares, PM's, etc.                                                                                                                                                           ...Of course that's the good news(!?), however it's my understanding that the above preparation may only be the prologue for what may happen come the end of the decade. But personally I'm fairly happy that I have most of phase-one covered, and as DB reminds us phase-two/monetary collapse may not happen, depends on government policies this decade.

[Majorpain]

32 minutes ago, spygirl said:

CB create the money  at the banks request.

Not true, the money created for mortgage/financing is simply magicked up out of thin air as long as the bank remain within its capital constraints.

This creates a problem that as the bank is not a central bank and cannot create currency, so technically its not "legal" money its creating....

[moneyscam]

2 hours ago, Castlevania said:

The problem is the credit markets. The Central Banks are totally scared of price discovery, and markets doing their thing because a number of companies would default and cause the entire lending market to seize up. The rounds of QE have been to save the credit markets.

A related problem is that banking book accounting is subjective and backward looking - you invariably only take provisions and write downs when things are already very bad. The derivative books by contrast are all marked to market on a daily basis, there’s no hiding. The focus since the financial crisis has been on the derivative side - nowadays a large amount of trades are routed through CCP’s such as LCH and Euronext; banks actively price in the counterparty risk of their clients and have trading desks that simply price and actively hedge this risk; and most derivatives are collateralised. 

I’m very wary of some of the lending books on banks balance sheets.

Every entity that uses OTC derivatives is required to clear in Europe under MIFIR. However not every entity will qualify or meet the membership criteria of a CCP. In practice membership of the CCP remains the preserve of the large dealer banks as they can meet the steep capital and net equity requirements that CCP membership requires. This is mitigated by the non qualifying entities being allowed to clear their trades through an existing CCP member or what is known as client clearing via a clearing member. The client's trade with the bank becomes the clearing members trade with the CCP.

So the clearing member bank has to manage this risk by applying the same initial margin / variation margin and collateral requirements that the CCP will apply to the clearing member. In essence, the bank faces the same counterparty risk with clients regardless of whether the trade is cleared through a CCP or not. The CCP's effectively only silo and mitigate the counterparty risk between dealer banks ie between clearing member to clearing member at the CCP.

Last time I looked circa 65% of OTC trades are dealer (bank) to client, the rest being dealer to dealer (bank to bank). So  a good chunk of individual client counterparty risk still lies with the bank in reality. 

[sancho panza]

On 27/12/2021 at 12:08, Juniper said:

I saw an argument for a strong dollar this morning from Chase Taylor of Pinecone Macro:

It does make sense that energy may be a strong influence given the current prices. Currency still proves too complex for my understanding so I just thought the different perspective was interesting.

Jesse Felder talked on macrovoices last week about a ‘trifecta’ of rising energy prices, rising dollar and rising interest rates leading to an earnings recession…perhaps an option for where we’re headed? @sancho panza this is similar to your theory but I’m not sure your thoughts on the dollar?

and @CannonFodder

I msut say thought provoking commetns.Been busy with kids and moving house.Been thinking about this since I read your commetns.If I get some research time tmrw then I'll have a dig through ye olde dollar/recession/stock market drops timelines.

I've previously published my BK checklist and remain long as a result of not enough ticks on the lsit.

I saw someone put up a David Hunter psot the other day and he was talkign about a run back down in the dollar(which would happen to coincide nicely with his blow off top prediction.WHilst I wouldn't time off DH ,I don't feel comfortable surfing in the opposite direction to him,he seems to get the tidal moves quite well in a similar way to @DurhamBorn,not surprising given similar mentors.I know DB never normally shies away from a call(unlike me) but I remember him being unsure if we'd bottomed on the DXY or whether there was room for anotehr leg down.Be interesting to hear his views on the matter.

AS you say CF,all these countries raising rates and Fed staying steady does imply weaker dollar.Historically,I know 08 had a perfect weak dollar phase up and down before the smash in Oct and much as we had a weak dollar phase to the 90 level,it didn't really feel like a pre BK weak dollar phase to me.

If we get a proper run down in the dollar to 85 on the DXY then we could see oil/gold moonshoot and then I'd be ready to move sell and move short/to cash.

[DurhamBorn]

@sancho panza liquidity says my 85 target is still in play,but there is cross market now saying 92 might be the floor.Its difficult because the long range call tagged the target and saw a turn.I think 85 is still likely,but i wouldnt trade it.

https://www.telegraph.co.uk/business/2021/12/27/energy-bills-could-treble-without-20bn-government-fund/

Someone needs to tell them this isnt the end of gas price increases,they will get worse starting late 2023.

One thing im a bit miffed at is not having leveraged the gas call enough.I saw it as the top 2 asset for the cycle with silver and although very big profits on the likes of Repsol and some small pure gas players i should of put more work in to find how to leverage things more.I expected the rises to start late next year though and this initial spike to be liquidity driven.

Iv made 50 years energy bills so far in the sector but should of been much more.Difficult commod to leverage though outside of small caps.

 

[reformed nice guy]

I was lucky with a gas producer  called ovintiv. Got my ladders at 12, 9, 7.5 but never got 5. Currently 33 but has been at 40 this year. All down to you DB, you gave me the confidence in the sector and the ladder system to keep the emotions out.

[sancho panza]

23 hours ago, CannonFodder said:

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

Not banks loan books are equal.By that I eman that some of them are effectively given consdierable leeway in terms of risk weighting(which affects how much capital they msut hold agaisnt the loan).Basel 3 allows for larger banks to use the IRB approach and risk weight their own assets according to their own historical data.Smaller banks use the standardized approach.

I haven't delved into banks finanacial reports mcuh as I have more productive things to do with my time as buying bank stocks isn't on my radar.However,I would hesittate to assume that all the problems pre 08 have been buried,let alone the problems that have built up since,

The UK (and many Western nations) are running 5% ++ fiscal deficits into national detbs that are approaching 100% of GDP and that's before we start including unfunded liabilites like pensions.So many jobs are govt funded that you can't view the hosuing market in isolation from it any more.

Below is a Link to paper by Kevin Dowd and Dean Buckner where they discusss the situation of the UK banks balance sheets and then suggest that a better way of judging capital adequacy in a bank than taking at face value what they claim to be their Tier 1 capital ratio ,is to divide market cap buy total assets as the market cap is the marekts way of risk weighting their laon books.

If you remember when northern rock went bust it's capital ratios were in order, but it was runign all sorts of tricks to maximise profits under Basel 1.The bit by Marco Onado is excellent ( but they're all pretty good)

https://www.researchgate.net/publication/227430776_The_Failure_of_Northern_Rock_-_A_Multidimensional_Case_Study

(Onado)argues that while there is no doubt that Northern Rocks business model was extreme, one can argue that its underlying philosophy was shared by many other banks. He emphasises the combination of aggressive asset growth, minimisation of capital, and funding risks designed to maximise rates of return on equity as a common denominator. He also argues that the business model of Northern Rock stretched to the maximum extent the opportunities for regulatory arbitrage induced by Basel 1 and which led to dramatically overlooking the fundamental role of capital in banking.

https://iea.org.uk/wp-content/uploads/2020/07/How-reslient-are-UK-banks-3.pdf

Banks’ average capital ratios have fallen from 11.2 per cent then to 2.3
per cent now, a fall of 80 per cent. The implication is that a loss of £139
billion or just 2.3 per cent of their assets would be enough to wipe out the
capital of the banking system.
The banks’ average leverage has increased almost fourfold from 8.9 then
– and banks were widely regarded as being excessively leveraged going
into the GFC – to an almost off the chart leverage of 44 now.1 A traditional
bankers’ rule of thumb is that leverage should be no more than 10 to be
considered safe

15 hours ago, CannonFodder said:

I agree there will be some properties where the banks lose money but in aggregate the majority of properties will cover their loan or pay the rates. People will lose houses as bank profits increase.

The riskier mortgages will be the most recent as Ltv high without time to pay off. Banks will try to limit these as things get going naturally. Refuse remortgage or sell to vulture

GOV wont like this, question is whether we see a freddie fannie NAMA in the UK

I would suspect CB's are hoping that ,as per DB's point below,inflation will hide all manner of dodgy loan defaults,but there's a lot of hope in that strategy.If we get a credit deflation running alongsdie price inflation in essentials,then it could be really interesting to see whether some of the banks make it.

My moeny would be on Standard/HSBC/Lloyds doing better and Nationwide/Barclays

13 hours ago, DurhamBorn said:

I think this is right.Banks (and insurers) will make much higher profits from rates that should cover losses.I think one outcome will be much more social house building and more multi generation living.The banking sector had its balance sheets repaired,the bankrupt now are governments.Of course every £ less the government spends will be then a destruction of a private asset.The reason i wont own banks though is derivative risk.That could take them down,not their own loan book.

I'm not sure they are repaired DB.Higher rates will increase margins but it's an itneresting bet as to which banks will make it through the BK wave of defaults.I've laid out my bets above but I think even they might be optimisticHSBC has a raft of problems and gets 60% of it's profits from HK iirc.It was also lending to Mortgagors who were firends(up to four) up to a couple of years ago(although whether many such laons were written is a key point).

My big issue with betting on the banks is that they have serious form for cooking the books by hedging risk inappropriately,lending inappropriately and pay their boards inappropriately.

 

13 hours ago, Castlevania said:

I disagree. It’s the loan books that will hole the banks. 

I'm with you on this CV.I think the problem is in the levels of capital.Inadequate.Again.

[CannonFodder]

12 hours ago, spygirl said:

https://www.bis.org/bcbs/publ/d424_hlsummary.pdf

I dont think UK has a mortgage security market anymore.

Going forward, banks will have to hold 20% capital against mortgages.

20% deposit, 20% from bonds rest drawn down from BoE.

 

https://www.thetimes.co.uk/article/trapped-by-the-private-equity-mortgage-vultures-mdwh8c3dj

Alive and well i.m afraid, though buyers tend to be more US based and in the case above named after a demon that guards the gates of hell. Who said bankers not without humour.

MBS a bit of a poisonous term these days. Distressed asset security or residential REIT underwritten bonds a bit more marketable

[sancho panza]

12 hours ago, DurhamBorn said:

Depends on the banks and where their loans sit.Residential loan books can be 60% LTV average.Rates going up make a massive difference here because at 5% the banks can swallow a lot of defaults before they go under due to profits.Main victims will be people losing their equity i think.There will be lots of dislocation ahead thats certain.Key is to keep to the de-complex areas mostly.

These Private Equity loans could be where most danger sits,so anyone lending to them will be in trouble of course.

 

Wise words and ones that I'm heeding to the letter.

Agreed,private equity could be a mess.

9 hours ago, Cattle Prod said:

Pemex CEO catches up with the thread:

What he doesn't say is that they are net importers of petroleum already, they just don't have the refinery capacity for their own crude...yet... So the subtext here is that their declining production is catching... down...to their refining capacity, and they'll still be importing refined products from the market.

Either way, a once substantial exporter bites the dust and becomes a net drain on energy flows, as said here last year. Forever.

Who's next?

Must say was running my slide rule over Brent earlier,back at $78,same level as Sept 2018 when BP was £5.70..............

You've been psoting this stuff on OPEC members being short quota for sometime,so it's interesting to see the details develop around the theme.Really confirms the thesis. I'd imagine there's going to be some members of the MSM getting a bit of a shock in the New Year,and a lot of Western coutnries in for an even bigger shock next winter.

The more I learn about the oil market,the more bullish I'm getting,although the shares aren't that cheap any more.

 

8 hours ago, Castlevania said:

The problem is the credit markets. The Central Banks are totally scared of price discovery, and markets doing their thing because a number of companies would default and cause the entire lending market to seize up. The rounds of QE have been to save the credit markets.

A related problem is that banking book accounting is subjective and backward looking - you invariably only take provisions and write downs when things are already very bad. The derivative books by contrast are all marked to market on a daily basis, there’s no hiding. The focus since the financial crisis has been on the derivative side - nowadays a large amount of trades are routed through CCP’s such as LCH and Euronext; banks actively price in the counterparty risk of their clients and have trading desks that simply price and actively hedge this risk; and most derivatives are collateralised. 

I’m very wary of some of the lending books on banks balance sheets.

You raise an interesting point CV.Fristly,ref derivative hedging,the reality is that even when it's collateralized ,there may still be a need for mutual haircuts in the event of a Lehman, @moneyscamyou got a view on bak solvency from the derivatives side?

Secondly,you raise the issue of counterparty risk and I think we shiuld maybe consdier it more broadly because the UK govt is the biggest employer in the land  and funds the pay roll with a lot of printed/borrowed cash.What happens if rates and inflation rise and UK Plc can't afford pay rises for teh NHS?Higher net interest rate margins won't help Nationwide in that situation

Anotehr example to consideer is CRE.AS many on here will know,the Junior Panza's all go to Leicester market to learn to wigh value/quantity/quality in fruits.The route takes us through a city centre where teh CRE is gradually becoming worthless.It's survived the last few years because the council has been  investing(cough,cough) but now they've realsied that it isn't a sure thing,even they've stopped buying.The shoppers with moeny are all using the out of town centres.Point is that these laons will at some point default.Heaven forbid the charities no longer fill the shops because then the rates will need paying.

Just two examples of sectors that could initiate significant debt defaltionary forces.

 

[sancho panza]

6 hours ago, PrincessDrac said:

If I rent my Divs will cover the rent for now. I know a risk, but so is crossing the road.

I had no mortgage so I'm now liquid should we see any downside in the market.

That's how we live,although aslong as we have jobs,the divi's get reinvested.I'm far more worried aobut hedging our fuel and food than I am UK hosue prices.

At 840,I'd have a run at Fres on the options.

5 hours ago, moneyscam said:

Every entity that uses OTC derivatives is required to clear in Europe under MIFIR. However not every entity will qualify or meet the membership criteria of a CCP. In practice membership of the CCP remains the preserve of the large dealer banks as they can meet the steep capital and net equity requirements that CCP membership requires. This is mitigated by the non qualifying entities being allowed to clear their trades through an existing CCP member or what is known as client clearing via a clearing member. The client's trade with the bank becomes the clearing members trade with the CCP.

So the clearing member bank has to manage this risk by applying the same initial margin / variation margin and collateral requirements that the CCP will apply to the clearing member. In essence, the bank faces the same counterparty risk with clients regardless of whether the trade is cleared through a CCP or not. The CCP's effectively only silo and mitigate the counterparty risk between dealer banks ie between clearing member to clearing member at the CCP.

Last time I looked circa 65% of OTC trades are dealer (bank) to client, the rest being dealer to dealer (bank to bank). So  a good chunk of individual client counterparty risk still lies with the bank in reality. 

MS,see you've already replied.I know we've discussed this before I think,but if we got antoehr lehman style event then what level of haircut would market participants haev to take at max and how would that effect the credit markets going forward,once the choking noise has stopped.

ASlo,what are the margin levels ,presume they vary as per marekt but could you give us an idea?

ALso,does the clearing member assume the collateral risk once they've taken the trade from the client bank?I'd presume not,but does it mean they stress test their client banks?

Given that a lot of junk bonds are running engative real yields at the moment,does that mean that  credit marekts are more xpsoed than normal to a credit event?

No pressure,hope the questions make sense.

 

[spygirl]

7 hours ago, CannonFodder said:

https://www.thetimes.co.uk/article/trapped-by-the-private-equity-mortgage-vultures-mdwh8c3dj

Alive and well i.m afraid, though buyers tend to be more US based and in the case above named after a demon that guards the gates of hell. Who said bankers not without humour.

MBS a bit of a poisonous term these days. Distressed asset security or residential REIT underwritten bonds a bit more marketable

Those are from the olde days of 2007.

It goes to show how useless both the banks and the borrowers were that, 14 years later, they cannot get the LTE below 80% so they can remortgage.

And these are not MBS. These are a bust bank loan book thats been sold off.

If these were MBS then the banks would nto have gone under - loans woudl have been flipped.

 

 

[Animal Spirits]

"And there will be a fight between those who want to be saved by the government and those who want to be free"

Some thread overlaps in this interview featuring Felix Zulauf.

[DurhamBorn]

https://www.dailymail.co.uk/news/article-10351327/Average-family-faces-1-200-hit-budget-soaring-bills-tax-rises-inflation.html

MSM full force on inflation now.This is where it becomes a huge political issue.So far the governments answer has to be to give even more to bennies,but this simple makes it even worse for those just above welfare level a disastrous policy as high bennies are one of the huge issues.

Notice as well the police precepts etc.Thats so we can pay for the three ex coppers in my close who all retired at 55 on huge precept funded pensions.More retired in my close than on duty in my town.

My partner was one of 8 responders yesterday in Co Durham,supposed to be 16.Last night on her section that should have 4 in nobody was coming in all dropped on long term sick,the service had zero responders.The bosses on their fat salaries are all sat at home while the service collapses.Most are just sitting it out for their pension.They cant get any young responders,they wont work nights or weekends,no point they get the same working somewhere else and getting UC.

State is sucking up so much wealth,but its not going on services anymore for the people paying the tax.This is revolution territory.

 

[moneyscam]

8 hours ago, sancho panza said:

That's how we live,although aslong as we have jobs,the divi's get reinvested.I'm far more worried aobut hedging our fuel and food than I am UK hosue prices.

At 840,I'd have a run at Fres on the options.

MS,see you've already replied.I know we've discussed this before I think,but if we got antoehr lehman style event then what level of haircut would market participants haev to take at max and how would that effect the credit markets going forward,once the choking noise has stopped.

ASlo,what are the margin levels ,presume they vary as per marekt but could you give us an idea?

ALso,does the clearing member assume the collateral risk once they've taken the trade from the client bank?I'd presume not,but does it mean they stress test their client banks?

Given that a lot of junk bonds are running engative real yields at the moment,does that mean that  credit marekts are more xpsoed than normal to a credit event?

No pressure,hope the questions make sense.

 

Hey @sancho panza. Sorry I wouldn't know the detail of haircuts and margin requirements by market as in our role as brokers we wouldn't get involved in the post trade processing once it went to the CCP. You might be able to find this by going to LCH website but I would also expect some of these details to be confidential.

I can confirm though that the clearing member would bear the risk of the collateral of their client as the deal is principal to principal between clearing member and bank's client outside the CCP.

As to effects on the credit market that is difficult to answer as that would depend on how widespread defaults are taking place within the CCP. Personally I think if it's one or two members defaulting there shouldn't be widespread effects in other markets as the design and intent of the whole CCP system is to manage and mitigate this. However ironically if it's many members because the risk has been concentrated and siloed in the CCP then we would have a disaster with many spill over effects into other markets as the major members of the CCP are also the major market participants in other markets.

[CannonFodder]

10 hours ago, sancho panza said:

Not banks loan books are equal.By that I eman that some of them are effectively given consdierable leeway in terms of risk weighting(which affects how much capital they msut hold agaisnt the loan).Basel 3 allows for larger banks to use the IRB approach and risk weight their own assets according to their own historical data.Smaller banks use the standardized approach.

I haven't delved into banks finanacial reports mcuh as I have more productive things to do with my time as buying bank stocks isn't on my radar.However,I would hesittate to assume that all the problems pre 08 have been buried,let alone the problems that have built up since,

The UK (and many Western nations) are running 5% ++ fiscal deficits into national detbs that are approaching 100% of GDP and that's before we start including unfunded liabilites like pensions.So many jobs are govt funded that you can't view the hosuing market in isolation from it any more.

Below is a Link to paper by Kevin Dowd and Dean Buckner where they discusss the situation of the UK banks balance sheets and then suggest that a better way of judging capital adequacy in a bank than taking at face value what they claim to be their Tier 1 capital ratio ,is to divide market cap buy total assets as the market cap is the marekts way of risk weighting their laon books.

If you remember when northern rock went bust it's capital ratios were in order, but it was runign all sorts of tricks to maximise profits under Basel 1.The bit by Marco Onado is excellent ( but they're all pretty good)

https://www.researchgate.net/publication/227430776_The_Failure_of_Northern_Rock_-_A_Multidimensional_Case_Study

(Onado)argues that while there is no doubt that Northern Rocks business model was extreme, one can argue that its underlying philosophy was shared by many other banks. He emphasises the combination of aggressive asset growth, minimisation of capital, and funding risks designed to maximise rates of return on equity as a common denominator. He also argues that the business model of Northern Rock stretched to the maximum extent the opportunities for regulatory arbitrage induced by Basel 1 and which led to dramatically overlooking the fundamental role of capital in banking.

https://iea.org.uk/wp-content/uploads/2020/07/How-reslient-are-UK-banks-3.pdf

Banks’ average capital ratios have fallen from 11.2 per cent then to 2.3
per cent now, a fall of 80 per cent. The implication is that a loss of £139
billion or just 2.3 per cent of their assets would be enough to wipe out the
capital of the banking system.
The banks’ average leverage has increased almost fourfold from 8.9 then
– and banks were widely regarded as being excessively leveraged going
into the GFC – to an almost off the chart leverage of 44 now.1 A traditional
bankers’ rule of thumb is that leverage should be no more than 10 to be
considered safe

I would suspect CB's are hoping that ,as per DB's point below,inflation will hide all manner of dodgy loan defaults,but there's a lot of hope in that strategy.If we get a credit deflation running alongsdie price inflation in essentials,then it could be really interesting to see whether some of the banks make it.

My moeny would be on Standard/HSBC/Lloyds doing better and Nationwide/Barclays

I'm not sure they are repaired DB.Higher rates will increase margins but it's an itneresting bet as to which banks will make it through the BK wave of defaults.I've laid out my bets above but I think even they might be optimisticHSBC has a raft of problems and gets 60% of it's profits from HK iirc.It was also lending to Mortgagors who were firends(up to four) up to a couple of years ago(although whether many such laons were written is a key point).

My big issue with betting on the banks is that they have serious form for cooking the books by hedging risk inappropriately,lending inappropriately and pay their boards inappropriately.

 

I'm with you on this CV.I think the problem is in the levels of capital.Inadequate.Again.

I think you are smarter than me and approach things from a logical manner so needed time to reflect.

I think we agree that banks profits increase due to leverage; the degree of leverage is what is undecided. 17 times according those figures is still significant.

I don.t approach from a logical point of view, I work with ex bankers and well... would be cautious of opaqueness and misdirection in all of their figures. cooking the books is too strong, everything will be according to rule but loopholes are highly valued. Placing things in a subsidary or joint venture a matter of course. 

BASEL 1 didnt work well imho, then 2 then 3. how will 4 and 5 turn out or maybe Basel 57 lol. Basel i feel is more about regulators and gov looking tough than being tough.

Doubts i have with Basel include

Transfering mortgages to another entity after creation

If a bank grants a motgage to Mr A and he buys a house from Mr B then B has a massive deposit in his account so the bank can create more mortgages on this new 'deposit' leverage of leverage

Likewise I sit in the camp of not knowing what their balance sheets are like in terms of repair as well, I am skeptical of the face value of figures reported. 

this however is my prejudices rather than logic

 

[CannonFodder]

3 hours ago, spygirl said:

Those are from the olde days of 2007.

It goes to show how useless both the banks and the borrowers were that, 14 years later, they cannot get the LTE below 80% so they can remortgage.

And these are not MBS. These are a bust bank loan book thats been sold off.

If these were MBS then the banks would nto have gone under - loans woudl have been flipped.

 

 

i assume you skimmed it, article is 2021 and talks about mortgage sold and resold, not bankrupt assets at all.

There was a campaign supported by Tory Mps for gov to investigate the practice in 2019 as still ongoing now and no british banks bankrupting then.

Alas for the campaign, somethings were unearthed in the MPs former life and he was removed from the tory party a few months later.

https://www.google.com/amp/s/www.thisismoney.co.uk/money/mortgageshome/article-7119671/amp/MPs-call-ban-mortgage-prisoners-sold-vulture-funds-banks.html

[Roger]

20 hours ago, stoobs said:

Banks create money at the point of issuing a loan.

That money is then destroyed when the loan is repaid.

The bank does not need to obtain that money from anywhere else as it didn't exist before the loan was issued.

So what's the double entry for this?

I'd have thought that they would debit Loans on the asset side of their balance sheet and credit Current Accounts on the liability side.

What happens next depends on what the customer does but they're unlikely to leave the money in a current account. Ultimately it could end up in an interest paying deposit account or a bank bond or on the money markets. The bank is going to have to compete for each of these to ensure that its liabilities still match its assets. Thereby the bank has to fund its assets at a cost.

Imagining the banks were to make e.g. 74x their funding costs like CannonFodder's simple model suggests then what (apart from a floor set by expected bad debts and admin costs) would stop a bank charging less than base rate for its lending? They'd still make healthy profits and would expand their business. The answer must be that their marginal funding costs are near base rate.

[spygirl]

33 minutes ago, CannonFodder said:

i assume you skimmed it, article is 2021 and talks about mortgage sold and resold, not bankrupt assets at all.

There was a campaign supported by Tory Mps for gov to investigate the practice in 2019 as still ongoing now and no british banks bankrupting then.

Alas for the campaign, somethings were unearthed in the MPs former life and he was removed from the tory party a few months later.

https://www.google.com/amp/s/www.thisismoney.co.uk/money/mortgageshome/article-7119671/amp/MPs-call-ban-mortgage-prisoners-sold-vulture-funds-banks.html

The mortgage book is being sold and resold.

When NR BnB and the other junk failed, all the loans were transferred to NRAM - UK bad bank.

 

MBS are when the mortgage book is diced up and sold off with different yields and risk.

This is not the case with NRAM - the mortgage book as a whole was transferred to NRAM. Then NRAM books were sold to private equity. each time a large discount  was applied to  the book.

This was done to allow the bank to be shutdown in an orderly fashion and to allow the more solvent borrowers to fuck off somewhere cheaper.

The vulture funds are basically closed mortgages books.

If you daft enough to continue with an IO mortgage in the NRAM i.e. you havent got off your arse to pay down some of he equity  then theres no saving you.

It very hard to explain to mortgage prisoners but if youve had a mortgage since pre 2007 and you still cannot transfer it from the vulture  fund then you really should not have had the mortgage.

 

 

 

 

[spygirl]

2 minutes ago, Roger said:

So what's the double entry for this?

I'd have thought that they would debit Loans on the asset side of their balance sheet and credit Current Accounts on the liability side.

What happens next depends on what the customer does but they're unlikely to leave the money in a current account. Ultimately it could end up in an interest paying deposit account or a bank bond or on the money markets. The bank is going to have to compete for each of these to ensure that its liabilities still match its assets. Thereby the bank has to fund its assets at a cost.

Imagining the banks were to make e.g. 74x their funding costs like CannonFodder's simple model suggests than what (apart from a floor set by expected bad debts and admin costs) would stop a bank charging less than base rate for its lending? They'd still make healthy profits and would expand their business. The answer must be that their marginal funding costs are near base rate.

Customer draws down from bank, bank draws down from CB.Bank and

CB both record an asset in the book - a performing loan.

 

 

[spygirl]

44 minutes ago, CannonFodder said:

i assume you skimmed it, article is 2021 and talks about mortgage sold and resold, not bankrupt assets at all.

There was a campaign supported by Tory Mps for gov to investigate the practice in 2019 as still ongoing now and no british banks bankrupting then.

Alas for the campaign, somethings were unearthed in the MPs former life and he was removed from the tory party a few months later.

https://www.google.com/amp/s/www.thisismoney.co.uk/money/mortgageshome/article-7119671/amp/MPs-call-ban-mortgage-prisoners-sold-vulture-funds-banks.html

To give you an idea of how long this process has took -

Last part of Northern Rock is sold by Government more than a decade on from bailout

The body set up to take charge of parts of Northern Rock and other failed banks has sealed a £5bn deal for their assets

https://www.chroniclelive.co.uk/news/north-east-news/last-part-northern-rock-sold-19924939

Feb 2021

To put that in perspective for NR -

NR was found in 185, some merging n whatnot gave us NR as is /was  1965.

NR devitalised  in 1997 - funny, who was elected then?

IN September 2007 - all of 10 years later - it started asking for props. The sensationalist n Feb 2008.

Unfucking NR brief 10 years in the spotlight has took UKGOV  13 years

And these fuckheads still think UKGOV made money -

26 February 2021

UK government made a massive profit on NR & BB and I guess more profit to come from future nationisation of other companies.

 

 

 

 

 

 

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26 February 2021

 

Indeed they got the money back - although it could so easily have gone the other way. Nice final outcome though and we need to move on from the stigma this caused

 

 

 

 

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27 February 2021

 

The government (i.e. taxpayers) certainly deserve to obtain a return for protecting lenders against the "high-risk, reckless business strategy of Northern Rock" (source: Parliament Report). Remember the Directors and Senior Managers of Northern Rock were paying themselves huge salaries and bonuses, even though Northern Rock was making losses before the Global Financial Crisis laid bare just how inept they had been. They were smart enough, however, to move some of the stronger financial assets to the Channel Islands which restricted how the Government could respond.

The bailout of Northern Rock added a further 100 billion to the National Debt, money that had to be found by additional borrowing (source: Wikipedia). The return obtained the Government (taxpayers) is very modest in comparison, especially when inflation is taken into account.

The whole affair is an object lesson when commercial regulations are relaxed and "chancers" are able to take control of a previously stable institution that had served the North-East well. This isn't a party-political comment. Both major parties played a role in the creating the circumstances that led to the debacle, and both were happy to take credit when deregulation was paying off.

 

 

 

 

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6 March 2021

 

Graeme, (Part 1)

I am disappointed that a man in your position:-

(1) might mislead the public by stating that "The deal marks the end of a years-long effort to slowly dispose of the assets the Government BOUGHT when bailing out banks following the 2007-2008 crash". You must know that the Government 'STOLE' the Rosk shareholding of staff and many thousands of small investors - including pensioners mainly in our region - for absolutely NO payment whatsoever.

(2) makes these sort of references and the general loose facts only serve to perpetuate the Media myth that the Rock was a bad bank, when it was clearly NOT that at all. The Rock had massive assets, was solvent (with cash flow problems) and was bound to pay its way handsomely, using stolen property.

Ask yourself why in 2015 the Chancellor estimated that profits to the Government via the Rock handling would be £9.6 Billion, after all loans, penal interest and charges had been made by the bank.

Dennis Grainger (please see part 2) below

Chairman, UKSA Northern Rock Small Shareholders Action Group

 

 

 

 

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6 March 2021

 

Graaeme, Part 2

Consider that the Treasury trumpets this as a great success story, yet it held 113 Billion of assets against total loans (excluding unnecessary loans) of no more than 26 Billion, and managed to use that whole sum clearing the debt, which was never in reality "taxpayers money".

Consider also please;, why did they put £10.5Billion in taxpayer loans into NRAM, which specifically was precluded from engaging in new business. NRAM had to repay those loans but by law could not use them in any way and derived no benefit from them!

Consider: how can a SALE of the remaining assets to private parties who paid nothing other than an undisclosed price for the remaining assets, be viewed as a "return to the private sector?" Surely the only valid"return" should be to the shareholders who owned the whole 113Billion of assets in the first place and could be said to have been robbed of their shares.

There has been so much false information hysteria in the media and the Government's have been Trump-like.

My colleagues and I would really have hoped that a Business Editor of the region's principal newspaper would certainly fully appreciate the facts, and offer some factual clarity and some SUPPORT for the 'little people' of our region who have suffered so badly at the hands of the Government machine.

You could redress the balance perhaps by printing our Press Release issued yesterday.

Thank you,

Dennis Grainger

Chairman, UKSA Northern Rock Small Shareholders Action Group

 

 

 

 

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6 March 2021

 

Frazzle2 > Can I suggest that you (and anyone of fair mind who wants the real facts of the Government Duplicity involved here) get the correct detail by looking at our website.

Government is well capable of 'spinning' and that includes the self-serving propaganda via announcements, 'Parliamentary Reports' and via websites such as Wickipedia. Your 'debt' figures are fantasy.

Dennis Grainger

Chairman, UKSA Northern Rock Small Shareholders Action Group

 

 

 

 

See -

 

 

[Roger]

32 minutes ago, spygirl said:

Customer draws down from bank, bank draws down from CB.Bank and

CB both record an asset in the book - a performing loan.

 

 

I don't think banks draw down funding from their CB for every loan they make, but maybe they effectively do for some loans through the nightly clearing process.

The CB is going to charge the banks base rate on whatever they draw down, so again, the marginal funding cost for a bank making a loan is going to be near base rate.

[spygirl]

15 minutes ago, Roger said:

I don't think banks draw down funding from their CB for every loan they make, but maybe they effectively do for some loans through the nightly clearing process.

The CB is going to charge the banks base rate on whatever they draw down, so again, the marginal funding cost for a bank making a loan is going to be near base rate.

They pretty much do esp.for mortgages.

Unsecured lending/credit card - no