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According To Morgan Stanley This Is The Biggest Threat To Deutsche Bank’s Survival

According To Morgan Stanley This Is The Biggest Threat To Deutsche Bank’s Survival

Two weeks ago, on one of the slides in a Morgan Stanley presentation, we found something which we thought was quite disturbing. According to the bank’s head of EMEA research Huw van Steenis, while in Davos, he sat “next to someone in policy circles who argued that we should move quickly to a cashless economy so that we could introduce negative rates well below 1% – as they were concerned that Larry Summers’ secular stagnation was indeed playing out and we would be stuck with negative rates for a decade in Europe. They felt below (1.5)% depositors would start to hoard notes, leading to yet further complexities for monetary policy.”

As it turns out, just like Deutsche Bank – which first warned about the dire consequences of NIRP to Europe’s banks – Morgan Stanley is likewise “concerned” and for good reason.

With the ECB set to unveil its next set of unconventional measures during its next meeting on March 10 among which almost certainly even more negative rates (for the simple reason that a vast amount of monetizable govt bonds are trading with a yield below the ECB’s deposit rate floor and are ineligible for purchase) the ECB may cut said rates anywhere between 10bps, 20bps, or even more (thereby sending those same bond yields plunging ever further into negative territory).

As Morgan Stanley warns that any substantial rate cut by the ECB will only make matters worse. As it says, “Beyond a 10-20bp ECB Deposit Rate Cut, We Believe Impacts on Earnings Could Be Exponential.

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

 

This Is The NIRP “Doom Loop” That Threatens To Wipeout Banks And The Global Economy

This Is The NIRP “Doom Loop” That Threatens To Wipeout Banks And The Global Economy

Remember the vicious cycle that threatened the entire European banking sector in 2012?

It went something like this: over indebted sovereigns depended on domestic banks to buy their debt, but when yields on that debt spiked, the banks took a hit, inhibiting their ability to fund the sovereign, whose yields would then rise some more, further curtailing banks’ ability to help out, and so on and so forth.

Well don’t look now, but central bankers’ headlong plunge into NIRP-dom has created another “doom loop” whereby negative rates weaken banks whose profits are already crimped by the new regulatory regime, sharply lower revenue from trading, and billions in fines. Weak banks then pull back on lending, thus weakening the economy further and compelling policy makers to take rates even lower in a self-perpetuating death spiral. Meanwhile, bank stocks plunge raising questions about the entire sector’s viability and that, in turn, raises the specter of yet another financial market meltdown.

Below, find the diagram that illustrates this dynamic followed by a bit of color from WSJ:

From WSJ:

In a way, the move below zero was a gamble. The theory went like this: Banks would take a hit, but negative rates would get the economy moving. A stronger economy would, in turn, help the banks recover.

It appears that wager isn’t working.

The consequences are deeply worrying. Weak banks may now drag the economy down further. And with the economy weak and deflation—a damaging spiral of falling wages and prices—looming, central banks that have gone negative will be loath to turn around and raise rates.

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

“Pandora’s Box Is Open”: Why Japan May Have Started A ‘Silent Bank Run’

“Pandora’s Box Is Open”: Why Japan May Have Started A ‘Silent Bank Run’

As extensively discussed yesterday in the aftermath of the BOJ’s stunning decision to cut rates to negative for the first time in history (a decision which it appears was taken due to Davos peer pressure, a desire to prop up stock markets and to punish Yen longs, and an inability to further boost QE), there will be consequences – some good, mostly bad.

As Goldman’s Naohiko Baba previously explained, NIRP in Japan will not actually boost the economy: “we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years.”

What the BOJ’s NIRP will do, is result in a one-time spike in risk assets, something global stock and bond markets have already experienced, and a brief decline in the Yen, one which traders can’t wait to fade as Citi FX’s Brent Donnelly explained yesterday.

NIRP will also have at most two other “positive” consequences, which according to Deutsche Bank include 1) reinforcing financial institutions’ decisions to grant new loans and invest in securities (if only in theory bnecause as explained further below in practice this may very well backfire); and 2) widening interest rate differentials to weaken JPY exchange rates, which in turn support companies’ JPY-based sales and profit, for whom a half of consolidated sales are from overseas.

That covers the positive. The NIRP negatives are far more troubling. The first one we already noted yesterday, when Goldman speculated that launching NIRP could mean that further QE is all tapped out:

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

 

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