In Germany, Spain, the UK, Italy, Greece and the US, anywhere between 15 and 20 banks have something to hide and remain oblivious to risk. The Slog looks at why the failure to reform the sector will be a key factor in Crash2.
The aptly named Düsselhyp bank told us all in its last annual report that it was holding around €360m of Hypo Alpe Adria debt. Last week, Fitch ratings described it as “in urgent need of capital”. What, with all those assets just waiting to be repaid? Surely not. And having passed Mario’s stress test? Surely not. And with nearly E11bn in assets. Er….
It is worrying, I think, that a bank blows over for less than half a billion euros – Hypo Alpe’s HETA went up the pictures last week for €7.6bn – and The Slog wonders how many more bits of banking balsa wood are hiding from the wind in Germany….and elsewehere.
Either way, the Düsseldorf bank has gone bust and been bailed out by Berlin’s Care Machine. This emerged from Germany as the bank having “run into problems, and so the deposit protection fund will take over with a view to continuing its operations at a later date”, but it’s just spin: a complete takeover is envisaged, period. Doubtless, a new bad bank will appear at some point in time.
But now and then, bad banks get let out for good behaviour. Perhaps this might explain why Spain’s ambitious bank Sabadell (led by the low-profile Josep Oliu) has moved in with what looks, to be honest, like a rather generous bid for TSB. You will recall that TSB became a sort of bad bank to Lloyds a few years back; being a bad bank of Lloyds must be rather like hydrogen escaping from the Hindenburg, but it’s clear that the directors of The Bank that Liked to Say Yes far too often are hot to trot. I understand, however, that the UK’s regulator – the Prudential Regulation Authority (PRA) – might be under pressure to block the deal.
The pressure (as yet still a rumour) is from the Coalition: with an election looming – and Ed Miliband promising to set up Peoples’ Banks – the Labour Opposition could make hay from the Government allowing a Spanish bank to take over what used to be a Peoples’ Bank. I’m not so sure myself (I doubt if many voters would even notice these days) but I would support the PRA if it did block the deal.
If the lessons of Lehman and Austria have still not been learned, perhaps someone should tell Chancellor Osborne to spend less time with his nose, and more time keeping an eye on what is now gradually becoming The Big One for Crash2: bank-failure fuelled contagion. Senor Oliu is a smart operator, but his bank has ballooned in size through takeover rather than gradual organic growth.
Sabadell itself is allegedly well-run, but it operates in a socio-economic and political environment that is – to put it mildly – unstable. There are enough wobbly Britbanks as it is; the last thing they need is a largely untested eurozone owner. The Spanish bank has already admitted that the purchase of TSB would mean a deterioration on its capital ratio, and eurozone stress tests have historically been the creator of more bad jokes than bad banks. Oliu is looking overseas because his home market is dead: in and of itself, that should give us cause for concern.
Banking stress tests are (in my view) a bit of a waste of time anyway: with liquidity ratios being suggested at anything between 8-12% under the new Basel rules, we shouldn’t forget that Lehman had a 13% ratio, but still went down with all hands. Further, the future has a tendency to come out of left-field. And finally, once they know the test criteria, banks adjust their way of expressing the accountancy situation accordingly.
As to those last two points, the US Fed is at least working harder under Yellen to be creative about the future, and in turn being much less revelatory about the criteria. Not surprisingly, during the newly completed American tests, the banks squealed like piglets being taken off a tit about it….which tends to suggest that Yellen made a good call.
Ultimately, however, the problem that continues to get in the way of many investment banks is Zirp. I was against low interest rates from Day One (they reduced demand from Silvers, the biggest single and most undebted social group), and by definition reduce the margins banks earn on lending: as banks are by nature selfish, they’d rather do something else with the money – where there is less risk and better margins.
But perhaps way, way above any other factor are the two biggest elephants in the vaults: banks lie to protect themselves, and remain largely unreformed. The bonus pools are bigger than ever, and almost every week the likes of Goldman Sachs come up with yet another Day One idea that is tomorrow’s problem waiting to happen.
For example, the banks that did least well on the latest Fed tests were, surprise surprise, Bank of America, Deutsche Bank….and my old favourite for disaster, Santander.
BoA (and I have no fear of writs on this one) continues to be followed by clouds: about its business model, accounting methods, and management. Accusations and Class Action suits against them include frauds involving email use, foreclosure, unsecured loans, plastic cards, commodity market manipulation, cheating Fannie Mae and Freddie Mac, misreporting capital ratios, and money laundering. As a result BoA has been forced to pay – literally – billions of Dollars in regulatory fines.
Deutsche is at or near the top of most people’s calamity lists, if for no other reason than its gigantic derivative exposures. But the severity of the Fed’s statements about both DB and Santander should give cause for concern: they were “found to have serious deficiencies in capital planning and risk management”. And bear in mind, these are shifty bankers we’re dealing with here.
I’m forced back into wondering yet again whether the ECB boss Mario Draghi would ever really countenance loads of Greek banks folding as part of the argey-bargey going on beween Syriza and Troika 2. I doubted it on Perfidious Friday, and I doubt it even more today. But what’s clear already is that the banking sector’s tooth and nail lobbying against reform is going to cost us all dear. And this time, I suspect, things will sooner or later turn violent.