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Hong Kong Activist Leader Calls For a Run on the Bank

Hong Kong Activist Leader Calls For a Run on the Bank

Chen Haotian asks citizens to withdraw cash deposits to target Chinese banks.

Prominent Hong Kong pro-independence political activist Chen Haotian has called for a run on Chinese banks, asking that everyone withdraw their money on the same day.

Haotian is a founding member and the convenor of the Hong Kong National Party.

Arguing that large scale protests have only led to injuries and escalating police brutality, Haotian believes another method could be used to severely undermine China’s influence – a good old fashioned run on the bank.

He suggested that another method could be used, namely, impacting the financial system,” reports China Press.

“He called on Friday (August 16) that Hong Kong citizens take out all bank deposits. The primary goal is Chinese banks, but he said other banks should also be targeted, otherwise Chinese banks can borrow money from other banks to solve problems.”

Hong Kong has been rocked by weeks of violent protests by pro-independence campaigners. Earlier this week, riot police stormed Hong Kong International Airport to clear them out.

As we reported on Tuesday, while China is unlikely to invade using PLA troops, experts have suggested that soldiers could be disguised as Hong Kong police.

The Bank’s ‘Stress’ Tests

THE BANK’S ‘STRESS’ TESTS

MY REPORT ON THE BANK OF ENGLAND’S LATEST (NOVEMBER 2018) STRESS TESTS WAS PUBLISHED BY THE ADAM SMITH INSTITUTE ON AUGUST 3RD.

The purpose of the stress tests is, in essence, to persuade us that the banking system is in good shape on the basis of a make-believe exercise which purports to show what might happen in the event of a supposed severe stress scenario as modelled by a central bank with a dodgy model and a vested interest in showing that the banking system is in great shape thanks to its own wise policies.

We are expected to believe that the central bank has managed to rebuild the banking system despite enormous pressure placed on it by the institutions it regulates, whose principal objective is to run down their capital ratios (or equivalently, maximise their leverage) in order to boost their returns on equity and resulting short-term profits, and never mind the systemic risks and associated costs imposed on everyone else or the damage their high leverage did in the Global Financial Crisis.

These latest Bank of England’s stress tests were published in the Bank’s November 2018 Financial Stability Report, the core message of which was that the UK banking system was doing just great, but that a No-Deal Brexit would be a disaster. Wrong on both counts.

I will focus here on the first issue, the state of the banking system.

In essence, the Bank paints a reassuring picture of bank resilience. The message is that the UK banking system is now so strong that it could sail through another crisis that is more severe than the last one and still be in good shape. How do we know this? Because the stress tests tell us, claims the Bank. However, the truth is that the Bank’s stress tests are useless at detecting bank fragility.

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

Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket

Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket

For those who have grown bored with the ongoing US-China trade war whose escalation was obvious to all but the dumbest BTFD algos, the biggest news of the past week was that yet another Chinese bank was bailed out by the Chinese government – the third in the past three months – and a substantial one at that: with over 1.4 trillion yuan in assets ($200BN), Hang Feng Bank’s nationalization was certainly large enough to make a dent on the Chinese financial system and on the Chinese Sovereign Wealth Fund, which drew the short straw and was told to bailout the troubled Chinese bank (more here).

Hang Feng’s bailout followed those of Baoshang and Bank of Jinzhou, which means that 3 of the top 4 most troubled banks have now been either nationalized by an SOE or seized by the government, which is effectively the same thing.

Of course, to regular readers this development was hardly surprising, especially after our post in mid-July when we saw the $40 trillion Chinese banking system approach its closest encounter with the proverbial “Lehman moment” yet, when inexplicably the four-day repo rate on China’s government bonds (i.e., the cost for investors to pledge their Chinese government bond holdings for short-term funding) on the Shanghai exchange briefly spiked to 1,000% in afternoon trading.

While some attributed the surge to a fat finger, far more ominous signs were already present, and in the aftermath of the Baoshang failure, which has sent Chinese banking stocks tumbling, one-day and seven-day weighted average borrowing rates had remained low thanks to huge central bank cash injections – such as the 250BN yuan we described back in May  – longer tenors such as the 1 month repo have marched sharply higher.

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

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…

A Bank With 49 Trillion Dollars In Exposure To Derivatives Is Melting Down Right In Front Of Our Eyes

A Bank With 49 Trillion Dollars In Exposure To Derivatives Is Melting Down Right In Front Of Our Eyes

Could it be possible that we are on the verge of the next “Lehman Brothers moment”?  Deutsche Bank is the most important bank in all of Europe, it has 49 trillion dollars in exposure to derivatives, and most of the largest “too big to fail banks” in the United States have very deep financial connections to the bank.  In other words, the global financial system simply cannot afford for Deutsche Bank to fail, and right now it is literally melting down right in front of our eyes.  For years I have been warning that this day would come, and even though it has been hit by scandal after scandal, somehow Deutsche Bank was able to survive until now.  But after what we have witnessed in recent days, many now believe that the end is near for Deutsche Bank.  On July 7th, they really shook up investors all over the globe when they laid off 18,000 employees and announced that they would be completely exiting their global equities trading business

It takes a lot to rattle Wall Street.

But Deutsche Bank managed to. The beleaguered German giant announced on July 7 that it is laying off 18,000 employees—roughly one-fifth of its global workforce—and pursuing a vast restructuring plan that most notably includes shutting down its global equities trading business.

Though Deutsche’s Bloody Sunday seemed to come out of the blue, it’s actually the culmination of a years-long—some would say decades-long—descent into unprofitability and scandal for the bank, which in the early 1990s set out to make itself into a universal banking powerhouse to rival the behemoths of Wall Street.

These moves may delay Deutsche Bank’s inexorable march into oblivion, but not by much.

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

“It Would Be An Earthquake” – Three Chinese Banks Tumble After US Threatens To Cut Them Off From SWIFT

“It Would Be An Earthquake” – Three Chinese Banks Tumble After US Threatens To Cut Them Off From SWIFT 

In news that initially did not receive much prominence, on Monday a US judge found three large Chinese banks — reportedly the state-owned Bank of Communications, China Merchants Bank, and Shanghai Pudong Development Bank — in contempt for refusing to comply with subpoenas in an investigation into North Korean sanctions violations. This could open the door for them to be cut off from the US financial system, i.e. SWIFT. 

Should it occur, to say that China will not take that well is as large an understatement as one can conceive of. It would be an earthquake”, commented Rabobank’s Michael Every.

The stunning development follows a May district judge order that three Chinese banks comply with U.S. investigators’ demands that they hand over records connected to the alleged movement of tens of millions of dollars in violation of international sanctions on North Korea. The publicly released court document did not name the banks, the Hong Kong company, or the North Korean entity at that time.

As the WaPo adds, according to a 2017 ruling by the US DOJ, the banks were accused of working with a Hong Kong company, which allegedly laundered more than $100 million for North Korea’s sanctioned Foreign Trade Bank. The newspaper said the bank at risk of losing access to U.S. dollars appeared to be Shanghai Pudong Development Bank, whose ownership structure, limited U.S. presence and alleged conduct with other banks matched with the details disclosed in the court rulings.

Shanghai Pudong Development Bank doesn’t have U.S. branch operations but maintains accounts in that country to handle dollar transactions, the report said, adding the subpoena battle will go before a federal appeals court in Washington on July 12.

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

What is Money?

What is Money?

What is money? Although it might seem a straight-forward question, ‘what is money’ is a question which will return a wide variety of answers depending on who you ask. For something taken for granted and used by billions of people every day all over the planet, this is perhaps surprising.

Ask a person on the street about money, and they will most likely reply that money is the banknotes and coins in their wallet or pocket. Ask a central banker about money and they will probably mention cash, bank deposits and legal tender, noting that most ‘money’ is held electronically in banks. The central banker, if they are savvy, might also mention that gold is money, but will probably quote this ‘off the record’.

Ask a commercial banker about money, and if they understand the business of fractional-reserve banking, they will say, also ‘off the record‘, that banks create money out of thin air, taking in deposits and then lending these same funds, and more recently lending money into existence that never existed, thereby creating debt.

Ask an economist for their view on the money question, and the answer might revolve around defining the functions of money in an economy (a store of value, a medium of exchange and a unit of account) and a discussion of which forms of money best perform these functions. The economist might also mention the relative merits of different forms of money, such as fiat currency, commodity-backed money (gold and silver), and discuss terms such as hard money, sound money, paper money, and the characteristics of a desirable money.

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

China Hit By “Significant Banking Stress” As SHIBOR Plummets To Recession Levels

China Hit By “Significant Banking Stress” As SHIBOR Plummets To Recession Levels

It’s probably not a coincidence that just days after we reported that China’s interbank market was freezing up in the aftermath of the Baoshang Bank collapse and subsequent seizure, which led to a surge in interbank repo rates and a spike in Negotiable Certificates of Deposit (NCD) rates…

… that Beijing is doing everything in its power to keep liquidity flowing within the world’s largest, ~$40 trillion, financial system.

Case in point: China’s overnight SHIBOR lending rate tumbled overnight, sliding from 1.253%, and 1.924% a week ago, to just 1.11% today. This, as Commodore Research points out, marks the lowest level seen since June 12, 2015. 

In fact, the only other time this decade that SHIBOR rates fell to such a low level was back in 2015 (which was a period when China was likely undergoing a recession). Prior to 2015, the previous time that SHIBOR rates fell to 1.11% (or lower) was during the global financial crisis in 2008/2009.

As Commodore further notes, “there recently has remained talk of liquidity problems and banking fears in China (and these concerns have only grown since the Baoshang Bank failure in May). Low SHIBOR lending rates are supportive and accommodative in nature — but rates sitting at rare multi-year lows are likely an indication that China is facing significant banking stress at the moment.”

The report’s conclusion: “It is very rare for the overnight SHIBOR lending rate to be set as low as 1.11%.”

Meanwhile, as the world’s biggest financial time bomb ticks ever louder, traders and analysts are blissfully oblivious, focusing instead on central banks admitting that the recession is imminent and trying to spin how a world war with Iran would be bullish for stocks.

How Central-Bank Interest-Rate Policy Is Destabilizing Banks

How Central-Bank Interest-Rate Policy Is Destabilizing Banks

Broadly speaking, banks operate under the concept of maturity transformation. Banks take short-term – less than one year – financing vehicles, such as customer deposits, and use that to finance long-term – more than one year – returns. These returns range from the most commonly understood loans, such as auto loans and mortgages, to investments in equity, bonds and public debt. Banks make money on the interest spread between what they pay to the owners of the money and what is earned from the operations. Banks also make money on other services, such as wealth management and account fees, though these are relatively small compared to the maturity transformation business.

In terms of assets, the primary asset a bank holds is the demand deposit, also referred to as the core deposit. These are your everyday savings and checking accounts. Banks also sell Wholesale Deposits, such as CDs, have shareholder equity and also can take out debt, such as interbank lending. As these assets are owned by someone else, each of them demands a return for the use of those assets. These are part of the costs of operation for a bank. There are also more fixed operating costs, such as employees, buildings and equipment that must also be financed.

So, a bank will take assets and formulate loans on them. Like most of the world, the US operates on a fractional reserve system, one where banks originate loans in excess of the deposits on-hand. Take a look at the balance sheet of a large regional bank, 5/3 Bank, for example. For the 2018 fiscal year, 5/3 reported non-capital assets of $94 billion and a deposit base of $108 billion. However, the cash and cash equivalent component of these assets stood at $4.4 billion, or just 4% of demand deposits.

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

The Pivot Point

The Pivot Point 


The massive economic shock following the banking collapse of 2007–8 is the direct cause of the crisis of confidence which is affecting almost all the institutions of western representative democracy. The banking collapse was not a natural event, like a tsunami. It was a direct result of man-made systems and artifices which permitted wealth to be generated and hoarded primarily through multiple financial transactions rather than by the actual production and sale of concrete goods, and which then disproportionately funnelled wealth to those engaged in the mechanics of the transactions.

It was a rotten system, bound to collapse. But unfortunately, it was a system in which the political elite were so financially bound that the consequences of collapse threatened their place in the social order. So collapse was prevented, by the use of the systems of government to effect the largest ever single event transfer of wealth from the poor to the rich in the course of human history. Politicians bailed out the bankers by using the bankers’ own systems, and even permitted the bankers to charge the public for administering their own bailout, and charge massive interest on the money they were giving to themselves. This method meant that the ordinary people did not immediately feel all the pain, but they certainly felt it over the following decade of austerity as the massive burden of public debt that had been loaded on the populace and simply handed to the bankers, crippled the public finances.

The mechanisms of state and corporate propaganda kicked in to ensure that the ordinary people were told that rather than having been robbed, they had been saved. In the ensuing decade the wealth disparity between rich and poor has ever widened, to the extent that this week the BBC announced the UK now has 151 billionaires, in a land where working people resort to foodbanks and millions of children are growing up in poverty.

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

When Deutsche Bank’s Crisis Becomes Our Crisis

When Deutsche Bank’s Crisis Becomes Our Crisis

Our friends in Europe seem totally incapable of addressing their failing financial sector. And that’s not good for anyone.

By anandoart/Shutterstock

Americans generally think of Europe first as a wonderful place to visit. They rarely ponder the economic and financial ties between the United States and European Union, but in fact these ties are extensive and significant to the stability of both economies. One area of particular connection involves the large banks and companies that provide services on both sides of the Atlantic. It is this area of commercial finance that risks are actually growing to the United States—in large part due to political gridlock in Europe stemming from the 2008 financial crisis.

Credit market professionals have been aware of problems among the European banks for many years. Their lack of profitability, combined with high credit losses and a lack of transparency have created a minefield for global investors going back decades. Whereas the United States has a bankruptcy court system to protect investors, in Europe the process of resolving insolvency is an opaque muddle that leans heavily in favor of corporate debtors and their political sponsors.

When we talk about true mediocrity among European banks, one of the leading example are, surprisingly, German institutions. Germany, after all, has a reputation for being the economic leader of Europe and a global industrial power, thus the continued failures in the financial sector are truly remarkable.

The biggest example, Deutsche Bank, Germany’s largest bank, has had problems with capital and profitability going back decades. But Deutsche Banks’s problems are not unique. What is troubling and indeed significant for American policy makers, however, is the nearly complete failure of our friends in Europe to address their banking sector, either in terms of cleaning up bad assets or raising capital to enable the cleanup.

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

All That’s Missing Is a Black Swan

All That’s Missing Is a Black Swan

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
– Ludwig von Mises

The Federal Reserve chart above only goes back to 1970, but its message is clear, nevertheless. The velocity of money has dropped below that which was necessary to maintain a productive economy in 2009 and has never recovered.

The velocity of money can be defined as, “the rate at which money circulates or is exchanged in an economy in a given period.” It’s generally measured as a ratio of gross national product (GNP) to a country’s total money supply.

No money turnover… no economy.

But, if that’s so – if the chart is correct and the money turnover is by far the lowest since 1970 – why did the economy recover after 2010 and why are we in a bull market? Surely, the quantitative easing programme initiated by the Fed corrected the problem and happy days are here again.

Well, actually, neither of those commonly-held assumptions is correct. Quantitative easing didn’t pump money back into the failing economy and, more to the point, it wasn’t intended to. Most of the money that was created through quantitative easing never actually hit the streets.

To back up a bit, in 1999, the Fed, then under Alan Greenspan, convinced the US government, then under President Bill Clinton, to repeal the Glass Steagall Act, an act created in 1933 to assure that banks would never again recklessly create loans to the public that could never be repaid.

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

JPMorgan: We Are Fast Approaching The Point Where Banks Run Out Of Liquidity

JPMorgan: We Are Fast Approaching The Point Where Banks Run Out Of Liquidity

Last week we first noted that something unexpected has been going on in overnight funding markets: ever since March 20, the Effective Fed Funds rate has been trading above the IOER. This was unexpected for the simple reason that it is not supposed to happen by definition. 

As a reminder, ever since the financial crisis, in order to push the effective fed funds rate above zero at a time of trillions in excess reserves, the Fed was compelled to create a corridor system for the fed funds rate which was bound on the bottom and top by two specific rates controlled by the Federal Reserve: the corridor “floor” was the overnight reverse repurchase rate (ON-RRP) which usually coincides with the lower bound of the fed funds rate, while on top, the effective fed funds rate is bound by the rate the Fed pays on Excess Reserves (IOER), i.e., the corridor “ceiling.”

Or at least that’s the theory. In practice, the effective FF tends to occasionally diverge from this corridor, and when it does, it prompts fears that the Fed is losing control over the most important instrument available to it: the price of money, which is set via the fed funds rate. And ever since March 20, this fear is front and center because as shown in the chart below, starting on March 20, the effective Fed Funds rate rose above the IOER first by just 1 basis point, and then, last Friday spiked as much as 4 bps above IOER.

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

Here’s why the Federal Reserve rejected the safest bank in America

Here’s why the Federal Reserve rejected the safest bank in America

In the spring of 1692, an energetic young Scotsman named John Campbell started a new business in central London.

Campbell was a goldsmith, and his business sold jewelry and other crafted metals like plates and silverware.

But Campbell’s new company had another business line as well: banking. And the company he started eventually became Coutts & Co., a bank that still exists today in the UK.

Since the dawn of the Bronze Age thousands of years ago, metal workers (‘smiths’, from the word ‘smite’– to strike) were prominent, highly valued members of society.

Smiths were instrumental in construction, architecture, science, warfare, and art.

And they also provided some of the world’s earliest banking services.

For most of human history, money was metal– primarily gold and silver. And people knew that storing large quantities of gold and silver in their homes made their wealth prone to theft.

Goldsmiths already had tight security in their shops due to their significant inventories of precious metals.

So it was commonplace for other residents in town to store their own gold with the local smith, piggybacking on his security, in exchange for a nominal fee.

This was banking in its most traditional form: customer paid a fee to store wealth at a goldsmith’s shop.

By the time John Campbell set up his bank in the late 1600s, however, times had changed. Goldsmith-bankers had begun making loans… keeping only a small portion of their customers’ gold on reserve in the vault, and loaning out the rest at interest.

This is essentially the same model of banking that still exists today.

Giant institutions control trillions of dollars that we depositors dutifully provide to them.

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

The Birth of a Monster

The Birth of a Monster

The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended — the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.

Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.

Others, mostly those with a skeptical view of the Fed, treat its creation as an exercise in secretive government meddling (as in G. Edward Griffin’s The Creature from Jekyll Island) or crony capitalism run amok (as in Murray Rothbard’s The Case Against the Fed).

In my own chapter in The Fed at One Hundred I find sympathies with both groups (you can download the chapter pdf here). The actual creation of the Fed is a tragically beautiful case study in closed-door Congressional deals and big banking’s ultimate victory over the American public. Neither of these facts emerged from nowhere, however. The fateful events that transpired in 1910 on Jekyll Island were the evolutionary outcome of over fifty years of government meddling in money. As such, the Fed is a natural (though terribly unfortunate) outgrowth of an ever more flawed and repressive monetary system.

Before the Fed

Allow me to give a brief reverse biographical sketch of the events leading up to the creation of a monster in 1914.

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

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