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Wells Fargo – Banking Crisis?

It has begun. Wells Fargo has told all its customers that it is shuttering down ALL personal lines of credit. The bank has made it clear that it is shutting down ALL existing personal lines of credit and it will no longer offer such products. That includes revolving credit lines, which typically let users borrow $3,000 to $100,000. The bank used to sell these products as a way to consolidate higher-interest credit card debt or to pay for home renovations. This also included avoiding overdraft fees on linked checking accounts.

Customers have been given a 60-day notice that their accounts will be shut down. Wells Fargo has declined to comment when asked by Reuters. Previously, Wells Fargo suspended home equity loans, claiming it was due to the economic uncertainty with COVID. Wells Fargo has been struggling with a tarnished reputation following a series of consumer financial scandals. In 2016, the Wells Fargo account fraud scandal led to the resignation of CEO John Stumpf and resulted in fines of $185 million by the Consumer Financial Protection Bureau.

Despite the fact that Wells Fargo Bank likes to portray it was formed on March 18, 1852, the truth is that it was simply a freight company back then. It was in New York City where Henry Wells and William G. Fargo joined with several other investors to launch their idea of a freight company to cover the trade between the East and West Coasts. What sparked the idea was the discovery of gold in California in 1849. They recognized that there would be a demand for cross-country shipping. Wells Fargo & Company was formed to take advantage of this great opportunity.

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Whatever happened to that “imminent” banking crisis?

Whatever happened to that “imminent” banking crisis?

akrainer's Photo

In the aftermath of the 2008 financial crisis, many of us in the hedge fund industry expected continuing fallouts from the unresolved imbalances that were papered over with monetary and fiscal stimuli by governments and central banks. These measures failed to address, let alone resolve the systemic causes of the crisis. One of their consequences was a further weakening of large western banks, particularly the European ones. A new banking crisis was widely anticipated. Last June, Alasdair Macleod wrote that the “Next significant event therefore will almost certainly be the failure of a G-SIB if not in America, then elsewhere.”  [G-SIB = global systemically important bank]. In my recollection, Deutsche Bank for one, has been on a death watch at least since 2016, but the list of banks that should have collapsed already is long and full of household names.

Indeed, things looked very bleak when the Coronavirus pandemic struck and they deteriorated sharply from there. Yet, the banking system is limping along and no crisis has yet materialized. How to explain this? Last September I gave an interview on Renegade Inc. and went out on a limb with a hypothesis that only dawned on me about that time. Namely, I grew up in former Yugoslavia in the socialist regime under a one party system (Communist party, of course). The world I grew up in was pretty much one chronic crisis of stagflation which ultimately led to hyperinflation. My ‘eureka!’ moment happened when I realized that in spite of that state of affairs, we never had a banking crisis! No major bank failed and we had no bank runs at any point.

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Hong Kong Riots Reveal A Looming Crisis At The World’s 6th Largest Bank

Hong Kong Riots Reveal A Looming Crisis At The World’s 6th Largest Bank

Earlier today, in addition to the chaos surrounding the escalation of the US-China trade and currency war, we also got news which slipped under the radar that the CEO of HSBC, one which with $2.6 trillion in assets is the largest UK bank and the 6th largest bank in the world by assets, was unexpectedly quitting and his departure would also lead to mass layoffs, with the bank set to fire 4,000 workers, or about 2% of its workforce.

And while today’s market massacre succeeded in sweeping the HSBC news under the rug, one can’t help but wonder: is HSBC, which has had almost as many run-ins with the law as one particular infamous German bank, going to be the next Deutsche Bank?

For the answer we went to one of our blogging friends who runs the Strategic Macro blog, and who conveniently took a look at some of the cockroaches in HSBC’s basement. What he found was troubling, especially in light of the ongoing turmoil in Hong Kong which at any given moment is just a few minutes away and a false flag provocation away from a Chinese invasion.

Courtesy of the Strategic Macro blog, we present:

HSBC’s exposure to Hong Kong real estate

So conventional wisdom is that post-Basel III the banks hold a lot of capital against loans and are run conservatively. And in a normalised market this is very true I think.

However when you are calculating LTVs and RWAs and PDs against bubble valuation levels, are they still appropriate? If you calculated it against replacement costs, the LTVs would go through the roof, and so would RWAs and the banks would be left with an CET tier 1 equity deficit to be covered by a rights issue. Any losses and higher RWAs on impaired loans would further cost equity.

 …click on the above link to read the rest of the article…

The Big Bet Against Italian Banks

The Big Bet Against Italian Banks

Italy

The eurozone’s third-largest economy, Italy, is marooned in a deep political and economic crisis, with seeming endless problems: an economy that has barely grown in decades, sky-high unemployment rates, ballooning national debt, an inability to form a stable coalition government and, lately, a looming showdown with the EU over mounting debt.

These have precipitated a wave of populism that has rejected the old establishment and brought in a new guard.

Unfortunately, that has done little to resolve another Italian bugaboo: a massive banking crisis.

European banks have accumulated about $1.2 trillion in bad and non-performing loans (NPLs) that have continued weighing down heavily on their balance sheets. Italian banks are sitting on the biggest pile of bad debt: €224.2B ($255.9B), with NPLs and advances making up nearly a quarter of all loans.

As if that is not bad enough, the banks now have to contend with potentially heavy penalties coming from Brussels after Italy’s recalcitrant leadership refused to revise the country’s fiscal 2019 budget to lower debt and borrowing.

The sharks can already smell the blood in the water, and investors have been shorting Italian banking stocks to death. Italian banks hold nearly a fifth of the country’s government bonds.

(Click to enlarge)

Source: Bloomberg

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Source: Reuters

Short sellers have mainly been targeting medium-sized lenders as well as asset manager Banca Mediolanum and investment bank Mediobanca. According to FIS Astec Analytics data, the volume of these banks’ shares on loan—a good proxy for short interest—has shot to its highest in 15 months.

Short interest on Mediolanum’s shares now stands at 8.7 percent of outstanding shares, while Mediobanca has 15 percent of its shares sold short.

Rome Refuses To Back Down

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The Looming Mortgage Liquidity Crisis

Every 10 years or so there is a banking crisis. We are due. However, the furthest thing from most people’s minds with the Trump boom is a banking/financial crisis, except for a few folks at the Brookings Institution, who just released a paper entitled “Liquidity Crisis in the Mortgage Market.”

You Suk Kim, of the Federal Reserve Board; Steven M. Laufer, who also labors on the Federal Reserve Board along with Karen Pence, plus, Richard Stanton of the University of California, Berkeley, and Nancy Wallace, also of University of California, Berkeley, to give away the punchline from their paper’s abstract, write, “We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario.”

John and Joan Q. Public believe the 2018 mortgage business is like George Bailey’s Building & Loan in “It’s a Wonderful Life.” People deposit money, bankers lend it out, keeping the mortgage on their books. Easy Peasy.

As the folks from Brookings point out, it’s not that easy in these dark days of financial engineering. George Bailey’s handshake, promise and maybe a few words on a document to be signed by the borrower which meant simply, “I’ll pay you back,” has become a financial instrument, to be traded and hypothecated by faceless financial bureaucrats, each one taking a sliver of profit off the top.

Everyone remembers the crash of 2008 and plenty explanations have been posited. What the writers for Brookings explain is,

The literature has been largely silent on the liquidity vulnerabilities of the short-term loans that funded nonbank mortgage origination in the pre-crisis period, as well as the liquidity pressures that are typical in mortgage servicing when defaults are high. These vulnerabilities in the mortgage market were also not the focus of regulatory attention in the aftermath of the crisis.

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Will US Companies Repatriating Cash Home Create Banking Crisis Outside USA?

QUESTION: Mr. Armstrong; Do you believe that if American companies do repatriate dollars to get the low tax rate in the USA, will this impact foreign banks as capital withdraws? I figured you are the best qualified to answer that question nobody seems to be discussing.

Thank you for sharing your expertise.

SY

ANSWER: That is a very interesting question and it is indeed unique. I cannot think of anyone who has asked that one yet.  Let us assume that U.S. corporations will repatriate at least 25% of their estimated US$2.6 trillion of offshore funds to take advantage of a one-off 14% tax holiday. It will not matter if they are selling euros, yen, pounds, or yuan. Switching their funds from the offshore dollar funding markets to domestic dollars will have a similar impact on the same trend that took place between 1980 and 1985 that drove the dollar to all-time record highs.

American corporations moving capital sends a powerful impulse through global finance system. Despite the rise of China and the creation of the euro, the world has never been so “dollarized” as it is today. The euro is a complete failure for there is no single market with a centralize debt to compete with the dollar as an alternative. China is rising, but it is not ready for prime time. There is no alternative to the dollar. That is the real crisis in the world economy.

U.S. lending rates are critical to the world economy. The Bank for International Settlements (BIS) says offshore dollar funding has risen fivefold to US$10.7 trillion since the early 2000s, with a further US$14 trillion of global dollar debt hidden in derivatives. BIS research also confirms that the rise and fall of the dollar is the major cycle of dollar liquidity which is driving the world’s investment appetite and global asset prices. This liquidity spigot is clearly being turned off. The Fed is not only raising rates, it is also reversing bond purchases exactly OPPOSITE of the ECB which openly admits it will repurchase government debt as it expires because they know there are no buyers at these rates. The Fed is shrinking its balance sheet while the ECB is trapped and cannot dare take the same steps.

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Lativa Banking Crisis Unfolding on Schedule – Will There Be a European Contagion?

 

The Latvian Financial Supervisory Authority is concerned announcing a resolution plan for the crisis bank ABLV that is threatening a contagion risk of further closures of financial institutions in the country with a predominantly foreign customer base. There is a serious risk of a contagion unfolding that will also force consolidation and mergers in the industry as a whole. The financial system of the Baltic country has seen a run with customers withdrawing about 500 million euros in deposits in recent weeks. There are about ten banks in Latvia who have been serving primarily foreign customers. Concerns and a decline in confidence unfolding in Europe as a whole over the banking system as a whole may force a change in the business model of Latvian banks where they must return to a reliance upon domestic deposits rather than foreign.

Latvia’s third largest financial institution, ABLV, is about to collapse after being accused by the US of being involved in money laundering by customers from neighboring Russia and Ukraine. The bank denied the allegations but simply making those allegations by New York prosecutors can have a devastating impact upon foreign banks. A run on the bank began after the allegations were made public. The European Central Bank (ECB) came to the conclusion that the bank was facing collapse. The European Agency for the Settlement of Marged Banks (SRB) classified the bank as non-systemically important and left it to its fate. In Latvia, loans are provided mainly by Scandinavian banks located in Sweden. Many Latvian banks have specialized in financing themselves mainly through deposits of foreigners rather than domestic Latvian citizens. The crisis brewing stems from the fact that about 40% of Latvian bank deposits come from abroad. Allegations of money laundering by the US authorities have been sending foreign depositors into a state of panic.

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Will Italy’s Banking Crisis Spawn a New Frankenbank?

Will Italy’s Banking Crisis Spawn a New Frankenbank?

“Operation Overlord.”

There are rumors currently doing the rounds that Italy’s banking problems have finally been put to rest. The FTSE Italia All-Share Banks Index has soared about 40% over the last 12 months, about double the advance by the Euro Stoxx Banks Index. Six of the top seven gainers in the latter index this year are Italian.

The story of Italy’s non-performing loans, which just a year ago terrified global investors and posed a systemic threat to the entire Eurozone economy, “is over,” according to Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance. Pagani believes that now that the banking sector is well and truly on the mend, work should begin to take consolidation of the sector to a new level.

“There are too many banks,” Pagani told Bloomberg. “And in this sense, Monte dei Paschi could play a role. I think this could start this year.”

There’s clearly lots of room for consolidation in Italy, home to roughly 500 banks, many of which are small local or regional savings banks with tens or hundreds of millions of euros in assets. At the top end of the scale, Italy’s ten biggest banks control roughly 50% of the industry. The goal is to increase thatto 70-75% to bring it more in line with the levels of banking concentration in other EU countries. In Spain, for example, the five biggest banks — Santander, BBVA, CaixaBank, Bankia and Sabadell — control 72% of the market.

The problem is that, while last year’s bail out of Monte dei Paschi di Siena may have restored a certain amount of investor confidence to Italy’s banking sector, many of the largest banking groups are still extremely fragile, with stubbornly high non-performing loan (NPL) ratios. .

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The Coming Banking Crisis & The End of Bailouts

Behind the curtain, there is a growing concern about a serious banking crisis beginning once again in Europe. Many governments are talking about the crisis behind-the-curtain and we are now beginning to see steps that are being taken to end the TO-BIG-TO-FAIL policies that dominated the 2007-2009 Crash.

The United States is looking at a new radical bank rescue policy where the government is proposing to revise a central pillar of the idea of bailing out banks creating new financial regulation with a new Chapter 14 bankruptcy procedure. They are looking at eliminating the risk of taxpayers’ costs to bail out banks. They are investigating the means for an orderly resolution so that the taxpayers do not have to bail out the banks. This development is causing some concern among the high-flying Wall Street banks, for if that is the case, then another crisis as 2007-2009 will result in even Goldman Sachs closing. The proposal looks to shift the burden to the shareholders and creditors of that bank. This means depositors who are thus creditors.

In Australia, we see similar legislation being proposed. This is the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017. This also authorizes bail-ins bringing an end to the bailout.

Russian Banking Crisis: 3rd Major Bank Topples in 4 months

Russian Banking Crisis: 3rd Major Bank Topples in 4 months

“It turned into a lender which financed its owners”: Central Bank.

It’s Friday, and another Russian bank gets taken over and most of its creditors get bailed out by the Central Bank, this time the 10th largest bank in Russia, Promsvyazbank – with the top six being state-owned banks; with number seven, Bank Otkritie, having toppled in August; with number 12, B&N Bank, having toppled in September; and with Jugra Bank having gotten its banking licence revoked in July for having falsified its accounts.

The bailout of Promsvyazbank (PSB) will require between 100 billion rubles and 200 billion rubles (between $1.7 billion and $3.4 billion), based on a preliminary estimate, said Central Bank deputy governor Vasily Pozdyshev on Friday, according to Reuters.

“Preliminary estimates” of bank-bailout costs have a way of morphing into bigger ones. The Central Bank, which is also the banking regulator, has already increased its estimate for the combined cost of the bailouts of Otkritie and B&N Bank to 820 billion rubles ($14 billion), but it now deems both too financially weak to continue.

The combined assets of PSB, Otkritie, and B&N would amount to 4 trillion rubles, equivalent to Russia’s fourth biggest bank, according to Reuters calculations. By comparison, Russia’s largest bank, state-controlled Sberbank, accounts for one-third of the Russian banking system, as it says, and has 22 trillion rubles ($374 billion) in assets.

PSB’s subordinated debt will likely be written off, Pozdyshev said. Shareholders will also take a big hit or be wiped out. They include as of the end of November: The European Bank for Reconstruction and Development, Russian financial group Budushchee, the Credit Bank of Moscow, and non-state pension fund Safmar.

But the Central Bank plans to honor the PSB’s other obligations to creditors and bondholders, which include other Russian banks. It always does this to avoid contagion.

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ECB and the Coming Banking Crisis

 

QUESTION: Mr. Armstrong; Your post of November 16th where you state that the ECB is looking to freeze accounts in a banking crisis, does that mean they will no longer honour the claimed insurance of €100,000 per account?

PH

ANSWER: No. They will not pretend to eliminate that insurance, they just will “suspend” it as a bank holiday. But you gloss over another problem. The insurance of  €100,000 is NOT per account, but PER PERSON. So taking €1 million euro and spreading among 10 banks does not thereby provide insurance for the whole lot. The same is true in the USA. The ECB is proposing supplementing it with discretionary powers to suspend bank withdrawals. To say that the entire program will be terminated is an exaggeration. Nevertheless, it reflects the realization that the European banking system is in serious trouble. I recommend that Europeans should have a stash of cash, and if you have a lot of cash in your account, put some into dollars in the States before it is too late.

EU Preparing for the Banking Crisis

Subtly, the EU is looking to establish preparations for the coming banking crisis and how to protect the banks from massive withdrawals. The solution? The EU wants to be able to temporarily free up credits for the banks and at the same time to freeze bank deposits, In other words, like Greece, you just won’t be able to withdraw funds.  Obviously, everything will be frozen. The current EU plan envisages blocking account disbursements for five working days and with the authority to extend any suspension to up to 20 days. They may need longer!

I recommend that you have 30 days worth of cash on hand. What the authorities do not understand is that if they freeze one bank, a run will unfold on all banks. The public will not believe whatever the government says. Therefore, banks that are not in crisis can be pushed into a crisis by a contagion. That is simply how it all unfolded in 1931-1933. The only way to stop a contagion will be a bank holiday and you have to close them all.

The End of Quantitative Easing – Perhaps Now It Will Be Inflationary?

If QE failed to produce inflation, then ending QE may actually produce the inflation people previously expected. Where’s the strange logic in that one? Well you see, it really does not matter how much money you print, if it never makes it into the economy, it will not be inflationary. Additionally, even if it makes it into the economy and the people hoard for a rainy day, it still will not be inflationary.

The craziest thing the Fed did was create excess reserves. The bankers complained that the Fed was buying the government debt so they would have no place to park their money. The Fed then accommodated them creating the Excess Reserves facility and paid them interest for absolutely no reason whatsoever.  Almost $3 trillion was parked at the Fed collecting interest so that $4.5 trillion of “printing” money never made it out the door. Hence, there was no inflation to speak of (outside of healthcare which always rises no matter what), and people hoarded. The pundit kept calling for a crash in the stock market but overlooked the fact that retail participation was at historic lows. Why? They were hoarding their money.

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Italy’s Banking Crisis Is Even Worse Than We Thought

Italy’s Banking Crisis Is Even Worse Than We Thought

The insider blame game has begun.

In this late winter of generalized discontent, it is not easy to pinpoint just where the biggest threat to Europe’s increasingly flimsy union lies, so intense is the competition. One obvious contender is the Eurozone’s third largest economy, Italy, which faces a banking crisis, an economic crisis, a debt crisis, and a political crisis all at the same time.

The country’s Five Star Movement is gaining momentum both in the polls and in its efforts to call for a referendum on euro membership. In the meantime, Italy’s newly installed government wants — indeed, needs — to bail out a growing number of banks but has neither the money nor the political capital to do so.

Things had gotten so bad that the country’s two bad banks (Atlante I and Atlante II), ostensibly created to stabilize the financial system, were themselves on the verge of collapse. Turns out that things are even worse than we had thought, following a blistering tirade on Tuesday from Italy’s bad banker-in-chief, Alessandro Penati.

“There is no clear vision of the problem and no strategy,” Penati told a financial conference in Milan, according to Reuters. He said he was virtually working alone on rescues that had revealed “horror stories” within some banks.

In short, the insider blame game has begun.

Penati, whose boutique asset management firm, Quaestio Capital Management, was chosen to oversee the supervision of Atlante in late 2015, directed much of his ire at the banks themselves, in particular Italy’s two largest financial institutions, UniCredit and Intesa Sao Paolo. Atlante’s investors had, he said, shown “zero long-sightedness,” after declining to invest more in the fund, which has used 80% of its money to rescue two mid-sized banks in northeast Italy — Veneto Banca and Banca Popolare di Vicenza. Both these lenders now need more capital.

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The Italian Banking Crisis: No Free Lunch – Or Is There?

The Italian Banking Crisis: No Free Lunch – Or Is There?

It has been called “a bigger risk than Brexit”– the Italian banking crisis that could take down the eurozone. Handwringing officials say “there is no free lunch” and “no magic bullet.” But UK Prof. Richard Werner says the magic bullet is just being ignored. 

On December 4, 2016, Italian voters rejected a referendum to amend their constitution to give the government more power, and the Italian prime minister resigned. The resulting chaos has pushed Italy’s already-troubled banks into bankruptcy. First on the chopping block is the 500 year old Banca Monte dei Paschi di Siena SpA (BMP), the oldest surviving bank in the world and the third largest bank in Italy. The concern is that its loss could trigger the collapse of other banks and even of the eurozone itself.

There seems little doubt that BMP and other insolvent banks will be rescued. The biggest banks are always rescued, no matter how negligent or corrupt, because in our existing system, banks create the money we use in trade. Virtually the entire money supply is now created by banks when they make loans, as the Bank of England has acknowledged. When the banks collapse, economies collapse, because bank-created money is the grease that oils the wheels of production.

So the Italian banks will no doubt be rescued. The question is, how? Normally, distressed banks can raise cash by selling their non-performing loans (NPLs) to other investors at a discount; but recovery on the mountain of Italian bad debts is so doubtful that foreign investors are unlikely to bite. In the past, bankrupt too-big-to-fail banks have sometimes been nationalized. That discourages “moral hazard” – rewarding banks for bad behavior – but it’s at the cost of imposing the bad debts on the government. Further, new EU rules require a “bail in” before a government bailout, something the Italian government is desperate to avoid.

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Olduvai IV: Courage
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Olduvai II: Exodus
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