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“The risk of over-tightening by the European Central Bank is nothing less than catastrophic” says Prof Kenneth Rogoff .

At Davos he also said: “Italy is extremely vulnerable. But this could pop anywhere. Global debt has gone up massively since the pandemic: public debt, corporate debt, everything.”

Rogoff believes that it is a miracle that the world averted a financial crisis in 2022, but the odds of a major accident are shortening as the delayed effects of past tightening feed through.

As Rogoff said: “We were very fortunate that we didn’t have a global systemic event in 2022, and we can count our blessings for that, but rates are still going higher and the risk keeps rising.”

But lurking in the murkiness is also the global financial assets/liabilities which is almost $500 trillion including the shadow banking system at 46% of the total. The shadow banking sector includes pension funds, hedge funds and other financial institutions which are largely unregulated.

Shadow banking is not subject to the normal mark-to-market rules. Thus no one knows what the real position or losses are. This means that central banks are in the dark when it comes to evaluation of the real risks of the system.

Clearly, I am not the only one harping on about the catastrophic global debt/liability situation.

And no one knows the extent of total global derivatives. But if they have grown in line with debt and also with the shadow banking system, they could easily be in excess of $3 quadrillion.

Cultures don’t die overnight, but the US has been in decline since at least the Vietnam war in the 1960s. Interestingly, the US has not had a real Budget surplus since the early 1930s with a handful of years of exception.

…click on the above link to read the rest…

Indian Government Nationalizes 4th Largest Bank As Shadow Banking Crisis Looms

March 5, 2020

Indian Government Nationalizes 4th Largest Bank As Shadow Banking Crisis Looms

Two years ago we first noted the building crisis in the Indian banking system, and now, as Bloomberg reports, the Indian government has stepped in to organize a rescue plan for the nation’s fourth largest private bank as a long-running crisis among shadow lenders threatened to spill over into the banking system.

“After 18 months of shadow banking crisis, the government did not want another major turmoil to hit the financial sector,” said Ravikant Anand Bhat, a senior analyst at Indianivesh Securities Ltd.

The government’s plan – to create a State Bank of India-led consortium to inject new capital into Yes Bank Ltd – would throw a lifeline to the embattled lender, which has been struggling to raise capital to offset a surge in bad loans.

Moody’s Investors Service cut the bank’s credit ratings in December and in January said its “standalone viability is getting increasingly challenged by its slowness in raising new capital.”

“Yes Bank is currently in the intensive care unit, and a State Bank capital injection will provide much needed oxygen,” said Kranthi Bathini, a director at WealthMills Securities Ltd.

Additionally, the finance ministry imposes a limit of 50,000 rupees on withdrawals (around US$650) from accounts held in Yes Bank, according to a gazette notification.

But the market does not seem reassured as India’s sovereign credit risk has recently spiked as virus fears and this banking system crisis comes to a head…

The RBI has superseded the board of Yes Bank for a period of 30 days “owing to serious deterioration in the financial position of the Bank,” the central bank says in a statement.

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

Pondering the Collapse of the Entire Shadow Banking System

October 26, 2019

Pondering the Collapse of the Entire Shadow Banking System

Image courtesy of my friend Chris Temple.

What’s behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.

Shadow Banking

The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then.

The above from Investopedia.

Hey It’s Not QE, Not Even Monetary

Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It’s Not Monetary.

Let’s recap before reviewing excellent comments from a couple of valued sources.

The Fed keeps increasing the size and duration of “overnight” funding. It’s now up $120 billion a day, every day, extended for weeks. That is on top of new additions.

Three Fed Statements

Emergency repos were needed for “end-of-quarter funding“.
Balance sheet expansion is “not QE“. Rather, it’s “organic growth“.
This is “not monetary policy“.

Three Mish Comments

Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
Hmm. Historically “organic” growth was about $2 to $3 billion.
Hmm. Somehow it takes an emergency (but let’s no longer call it that), $120 billion “at least” in repetitive “overnight” repos to control interest rates, but that does not constitute “monetary policy”

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

“Contagion Runs The Risk Of Spreading” In India’s Financial Sector, Rating Agency

October 24, 2019

“Contagion Runs The Risk Of Spreading” In India’s Financial Sector, Rating Agency

India, one of the largest emerging markets in the world, is at serious risk of widespread contagion ripping through its banking sector as many large financial companies have already seen their equity value halved over the last 12 months, S&P Global Ratings said in a report on Wednesday, also reported by Bloomberg.

India’s shadow lenders, also called non-banking finance companies, have been under severe pressure since the collapse of Infrastructure Leasing and Financial Services (IL&FS) last Sept., which was on the 10th anniversary of the bankruptcy of Lehman Brothers.

“India’s finance companies are among the country’s largest borrowers. A substantial part of this funding comes from banks. The failure of any large non-banking financial company or housing finance company may deliver a solvency shock to lenders,” said S&P Global Ratings credit analyst Geeta Chugh.

According to the report, the next big banking failure in India could run the risk of disrupting local credit markets, interbank markets, payments, and even damage economic growth.

“This contagion runs the risk of spreading to real estate companies too. Finance companies are the largest lenders to this segment and any failure among such institutions could jeopardize credit flows to developers,” Chugh said.
“The credit profile of a bank could deteriorate sharply due to outsized exposure to weak entities, huge market or operational losses, or significant deposit withdrawals if the depositors lost confidence in the bank,” Chugh added. “A governance deficit could also quickly turn to a trust deficit, hurting the stability of a bank.”

It’s likely that if one Indian bank fell, “the contagion could spread to other banks perceived to be struggling with the same problems as the failing bank,” S&P warned.

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

Is the Greatest Bull Market Ever Finally Ending? (Hint: Follow the Money)

October 18, 2018

Is the Greatest Bull Market Ever Finally Ending? (Hint: Follow the Money)

The key here is the gains generated by owning US-denominated assets as the USD appreciates.

Is the Greatest Bull Market Ever finally ending? One straightforward approach to is to follow the money, i.e. global capital flows: assets that attract positive global capital flows will continue rising if demand for the assets exceeds supply, and assets that are being liquidated as capital flees the asset class (i.e. negative capital flows) will decline in price.

Global capital flows are difficult to track for a number of reasons. A significant percentage of global mobile capital is held in secretive offshore tax havens and “shadow banking,” and tracking global corporate capital flows is not easy. Capital held in precious metals may not be reported, and assets such as enterprises and collectible art may be grossly undervalued for tax purposes.

Toss in shadow holding companies, LLCs with obscure trails of ownership, etc. and a definitive account of global capital flows is ultimately a guesstimate.

Despite the limitations of tracking global wealth, Credit Suisse Research Institute’s (CSRI) issued Global Wealth Report 2017 gives us some clues about where capital is flowing in and where it’s leaving for safer, higher-yield climes.

The first step in measuring global capital flows is to note that conventional capital is denominated in currencies which fluctuate in relative value. Of the roughly $300 trillion in global assets (Credit Suisse pegs the total in 2017 at $280 trillion, but other estimates range well above $300 trillion), about $8 trillion or so is in precious metals, and a tiny sliver is in cryptocurrencies. (Bitcoin’s total market capitalization is currently around $112 billion and Ethereum’s market cap is around $21 billion–signal noise in the $300 trillion sloshing around the world seeking safety, low/zero taxes, capital gains and high yields.)

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

“They Are Worried About Panic”: China Blocks Bad Economic News As Economy Slumps

October 2, 2018

“They Are Worried About Panic”: China Blocks Bad Economic News As Economy Slumps

China’s Shadow-banking system is collapsing (and with its China’s economic-fuel – the credit impulse), it’s equity market has become a slow-motion train-wreck, its economic data has been serially disappointing for two years, and its bond market is starting to show signs of serious systemic risk as corporate defaults in 2018 hit a record high.

But, if you were to read the Chinese press, none of that would be evident, as The New York Times reports a government directive sent to journalists in China on Friday named six economic topics to be “managed,” as the long hand of China’s ‘Ministry of Truth’ have now reached the business media in an effort to censor negative news about the economy.

The New York Times lists the topics that are to be “managed” as:

Worse-than-expected data that could show the economy is slowing.
Local government debt risks.
The impact of the trade war with the United States.
Signs of declining consumer confidence
The risks of stagflation, or rising prices coupled with slowing economic growth
“Hot-button issues to show the difficulties of people’s lives.”

The government’s new directive betrays a mounting anxiety among Chinese leaders that the country could be heading into a growing economic slump. Even before the trade war between the United States and China, residents of the world’s second-largest economy were showing signs of keeping a tight grip on their wallets. Industrial profit growth has slowed for four consecutive months, and China’s stock market is near its lowest level in four years.

“It’s possible that the situation is more serious than previously thought or that they want to prevent a panic,”said Zhang Ming, a retired political science professor from Renmin University in Beijing.

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

In Shock Move, India Nationalizes Giant Shadow Bank At Center Of Market Rout

October 1, 2018

In Shock Move, India Nationalizes Giant Shadow Bank At Center Of Market Rout

One week after we reported that India’s NPL crisis finally erupted after IL&FS, a major shadow bank at the heart of India’s economy defaulted in one day on three debt payments, India’s government announced on Monday that it would immediately seize control of a shadow lender whose defaults have caused widespread upheaval at mutual funds.

The nationalization is virtually unprecedented: the nation’s corporate affairs ministry has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services in 2009. A bid by the government to take control of debt-laden realty firm Unitech in late 2017 was stalled by the Supreme Court after the move was challenged.

According to Bloomberg, officials ousted Infrastructure Leasing & Financial Services Ltd.’s entire board and a new six-member board will meet before Oct. 8, the National Company Law Tribunal said on Monday. India’s richest banker Uday Kotak and ICICI Bank Chairman G.C. Chaturvedi will be part of the proposed board, which will elect a chairperson themselves.

An AAA-rated entity for decades, over the last few years IL&FS, saw an increase in its debt levels. The situation worsened in the last two months with both the parent company and its subsidiaries defaulting on a number of repayment obligations. Banks and insurance companies have the largest exposure to IL&FS.

For India to resort to such a dramatic move, the panic must have been palpable: the nationalization, which unfolded within the span of a hectic day in Mumbai, underscores the government’s concern about IL&FS’s defaults spreading to other lenders in the world’s fastest-growing major economy.

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

India’s NPL Crisis Erupts: A Major Shadow Bank Defaults On Three Debt Payments

September 23, 2018

India’s NPL Crisis Erupts: A Major Shadow Bank Defaults On Three Debt Payments

IL&FS Investment Managers, a unit of India’s Infrastructure Leasing & Financial Services (IL&FS) – an Indian infrastructure development and finance company and one of the nation’s largest “shadow banks” – which announced three debt defaults on Friday, said on Saturday morning its Managing Director Ramesh Bawa had resigned as managing director and chief executive officer as a management exodus begins. The company’s independent directors – Renu Challu, Surinder Singh Kohli, Shubhalakshmi Panse and Uday Ved – had also submitted their resignation papers.

The company first defaulted on commercial paper, then on short-term borrowings known as inter-corporate deposits according to Bloomberg. It has also failed to pay Rs 4.5 billion ($62 million) in ICDs to government-backed lender Small Industries Development Bank of India.

As we noted on Friday, IL&FS revealed a series of three defaults on its non-convertible debt obligations and inter-corporate deposits.

With the meltdown of IL&FS in motion, another unit, IL&FS Transportation Networks, reported that its chief financial officer, Dilip Bhatia, was demoted to chief strategy officer, for the goal of divestment of assets. The regulatory filing said Bhatia would relinquish his responsibilities as CFO with immediate effect, and the company will search for a replacement.

The shockwaves spread further on Friday, when IL&FS Financial Services, another unit of the IL&FS group, said its managing director and chief executive had resigned.

Why is this important? IL&FS’s outstanding debentures and commercial paper account for 1% and 2% respectively, of India’s domestic corporate debt market as of March 31, according to Moody, while its bank loans made up about 0.5% to 0.7% of the entire banking system loans.

And while bad loans in the Italian banking system have received a ton of attention from investors, India is not far behind and India’s economic recovery is built on an even shakier foundation.

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

Even Mortgage Lenders Are Repeating Their 2006 Mistakes

September 9, 2018

Even Mortgage Lenders Are Repeating Their 2006 Mistakes

You’d think the previous decade’s housing bust would still be fresh in the minds of mortgage lenders, if no one else. But apparently not.

One of the drivers of that bubble was the emergence of private label mortgage “originators” who, as the name implies, simply created mortgages and then sold them off to securitizers, who bundled them into the toxic bonds that nearly brought down the global financial system.

The originators weren’t banks in the commonly understood sense. That is, they didn’t build long-term relationships with customers and so didn’t need to care whether a borrower could actually pay back a loan. With zero skin in the game, they were willing to write mortgages for anyone with a paycheck and a heartbeat. And frequently the paycheck was optional.

In retrospect, that was both stupid and reckless. But here we are a scant decade later, and the industry is headed back towards those same practices. Today’s Wall Street Journal, for instance, profiles a formerly-miniscule private label mortgage originator that now has a bigger market share than Bank of America or Citigroup:

The New Mortgage Kings: They’re Not Banks

One afternoon this spring, a dozen or so employees lined up in front of Freedom Mortgage’s office in Mount Laurel, N.J., to get their picture taken. Clutching helium balloons shaped like dollar signs, they were being honored for the number of mortgages they had sold.

Freedom is nowhere near the size of behemoths like Citigroup or Bank of America; yet last year it originated more mortgages than either of them, some $51.1 billion, according to industry research group Inside Mortgage Finance. It is now the 11th-largest mortgage lender in the U.S., up from No. 78 in 2012.

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

Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”

June 17, 2018

Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”

As banks pull back from mortgage lending amid inflated prices and rising rates, “shadow banks” become very aggressive.

In the first quarter 2018, banks and non-bank mortgage lenders – the “shadow banks” – originated 1.81 million loans for residential properties (1 to 4 units). In the diversified US mortgage industry, the top 10 banks and “shadow banks” alone originated 260,570 mortgages, or 14.4% of the total, amounting to $75 billion. We’ll get to those top 10 in a moment.

Banks are institutions that take deposits and use those deposits to fund part of their lending activities. They’re watched over by federal and state bank regulators, from the Fed on down. Since the Financial Crisis and the bailouts, they were forced to increase their capital cushions, which are now large.

Non-bank lenders do not take deposits, and thus have to fund their lending in other ways, including by borrowing from big banks and issuing bonds. They’re not regulated by bank regulators, and their capital cushions are minimal. During the last mortgage crisis, the non-bank mortgage lenders were the first to collapse – and none were bailed out.

So let’s see.

Of those 1.81 million mortgages originated in Q1 by all banks and non-banks, according to property data provider, ATTOM Data Solutions:

666,000 were purchase mortgages, up 2% from a year ago
800,000 were refinance mortgages (refis), down 11% from a year ago due to rising interest rates.
348,000 were Home Equity Lines of Credit (HELOCs), up 14% from a year ago

HELOCs, which allow homeowners to use their perceived home equity as an ATM, are once again booming: $67 billion were taken out in Q1, though that’s still less than half of peak-HELOC in Q2 2006, when over $140 billion were taken out.

The Top 10 Mortgage Lenders in Q1 2018

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

Canada Has A Subprime Real Estate Problem, You Just Don’t Know It

June 16, 2018

Canada Has A Subprime Real Estate Problem, You Just Don’t Know It

A few weeks ago, a real estate agent told me about his client. Relatively wealthy older dude, closed on not one but two townhouses he plans on flipping. After some questions regarding who financed such a deal, he explains it was a private lender. Right before adding, “don’t worry, it’s not like in the US. This guy has good credit, he just couldn’t get enough money from his bank.”

I realized that people aren’t lying when they say Canadian real estate is nothing like the US in 2006. Canadians just don’t understand what happened during the US subprime crisis. They also don’t really understand subprime lending is alive and well in Canada, we just use different names.

Subprime Borrowers Vs. Subprime Loans

First, a quick lesson on subprime. The S-word is a dirty word in Canada, so there’s little discussion about what it means. Most people think “broke ass borrower” when they hear the term, but that’s not always the case. There’s subprime borrowers and subprime loans.

Subprime loans are any loans that are below prime, as in the typical lending criteria isn’t met. The part that’s poorly understood is a borrower, a loan, or any combination of those can be subprime. A borrower with excellent credit, might want a subprime loan. This happens more often than you think, and is usually because a bank won’t lend as much money as needed. No one thinks of a family in a nice neighborhood with a private loan to buy their fourth or fifth condo as subprime, but they are.

Don’t worry, it’s not just average people that don’t understand this. There’s still a lot of confusion about the issue in the finance community around the US subprime crisis. Most people knew subprime lenders blew up, and naturally blamed poor people and immigrants with low credit scores, as is the way.

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

Chinese Shadow Bank Lending Unexpectedly Crashes, Sending Total Credit Creation To Two-Year Low

June 13, 2018

Chinese Shadow Bank Lending Unexpectedly Crashes, Sending Total Credit Creation To Two-Year Low

According to most flow-tracking economists (and not their clueless, conventionally-trained peers) when one strips away the noise, there are just two things that matter for the global economy and asset prices: central bank liquidity injections, and Chinese credit creation. This is shown in the Citi charts below.

And if indeed it is just these two variables that matter, then the world is set for a turbulent phase because while global central banks liquidity is set to reverse a decade of expansion, and enter contraction some time in Q3 as the great “liquidity supernova” begins draining liquidity for the first time since the financial crisis…

… the latest Chinese credit creation data released on Tuesday, added significantly to the risk of a “sudden global economic stop” after the PBOC reported that in May, China’s broadest monetary aggregate, the Total Social Financing, just posted it smallest monthly increase since July 2016, confirming that Beijing’s shadow deleveraging campaign is accelerating and gaining even more traction, even if the threat of a global deflationary spillover is rising by the day.

A quick look at the numbers reveals that there was not much of a surprise in traditional new RMB loans, which rose RMB1150bn in May, slightly below consensus RMB1200bn, growing 12.6% yoy in May.

However, it was the sharp, unexpected plunge in Total social financing growth, which attracted attention and which rose only RMB 760.8bn in May, almost half the consensus print of RMB1300bn, and sharply below April’s RMB1560bn increase.

Of the main TSF components, the drop in shadow bank lending was particularly sharp: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in May.

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

The Role of Shadow Banking in the Business Cycle

June 11, 2018

THE ROLE OF SHADOW BANKING IN THE BUSINESS CYCLE

1The process of lending and the uninterrupted flow of credit to the real economy no longer rely only on banks, but on a process that spans a network of banks, broker-dealers, asset managers, and shadow banks funded through wholesale funding and capital markets globally. – Pozsaret et al., 2013, p. 10

I. Introduction

According to the standard version of the Austrian business cycle theory (e.g., Mises, 1949), the business cycle is caused by credit expansion conducted by commercial banks operating on the basis of fractional reserve.2Although true, this view may be too narrow or outdated, because other financial institutions can also expand credit.3

First, commercial banks are not the only type of depository institutions. This category includes, in the United States, savings banks, thrift institutions, and credit unions, which also keep fractional reserves and conduct credit expansion (Feinman, 1993, p. 570).4

Second, some financial institutions offer instruments that mask their nature as demand deposits (Huerta de Soto, 2006, pp. 155–165 and 584–600). The best example may be money market funds.5 These were created as a substitute for bank accounts, because Regulation Q prohibited banks from paying interest on demand deposits (Pozsar, 2011, p. 18 n22). Importantly, money market funds commit to maintaining a stable net asset value of their shares that are redeemable at will. This is why money market funds resemble banks in mutual-fund clothing (Tucker, 2012, p. 4), and, in consequence, they face the same maturity mismatching as do banks, which can also entail runs.6

Many economists point out that repurchase agreements (repos) also resemble demand deposits. They are short term and can be withdrawn at any time, like demand deposits. According to Gorton and Metrick (2009), the financial crisis of 2007–2008 was in essence a banking panic in the repo market (‘run on repo’).

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

Central Bank Money Rules the World

March 24, 2018

Central Bank Money Rules the World

Central bank credit that supports markets — is not just creation of the Fed, but by central banks and institutions around the world colluding together. Global markets are too deeply connected these days to consider the Fed in isolation.

Since last month’s correction, the world has been watching the Fed because its policies have global implications. And worldwide sell-offs sent a clear sign to Fed Chair Powell to relax with the rate hikes.

When fears arise that central bank QE will recede on one side of the world, we see more volatility and rumors of hawkishness. To counter those fears, there will be a move toward dovish policy on the other side of the world.

Central banks operate in collusion. When the Fed signals it is raising rates, or markets over-react negatively to the threat, another central bank steps in. By colluding, other central banks offer even more dark money-QE to keep the party going.

The net result is a propensity toward the status quo in global monetary policy: a bullish, asset bubble-inflating bias in the stock markets and caution in the bond markets.

Here’s what’s going on with some of the most powerful central bankers right now, starting with Japan…

While U.S. markets were correcting earlier this month, Japan’s financial benchmark, the Nikkei 225 index fell more than 1,200 points. At the same time, the rumors of Japan’s central bank curbing its dark money-QE programs are just that.

While investors have speculated that the BoJ could be moving towards an exit from dark money policy (despite the BOJ denying this), we know that central banks are too scared of the outcomes.

In an economic pinch, the Bank of Japan (BoJ), will keep dark money flowing.

Confirming my premise, when Japanese Government Bond prices were dipping too fast, the BoJ announced “unlimited” buying of long-term Japanese government bonds. This is simply the continuation of the policy the BoJ already has in place.

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

BIS Publishes A “Simplified” Map Of China’s Shadow Banking System

February 12, 2018

BIS Publishes A “Simplified” Map Of China’s Shadow Banking System

While China’s shadow banking sector may have been tamed in the past year as a result of an aggressive crackdown by Beijing over the unregulated, gray-market in high interest lending and especially Wealth Management Products or WMPs, it, it still retains an aura of incomprehensibility – and thus fascination – to most market watchers.

Still, while growth of shadow credit to ultimate borrowers has slowed, the use of shadow saving instruments (eg wealth management products, trust products) has continued to expand at a fast pace. New and more complex “structured” shadow credit intermediation aimed at reducing banks’ regulatory burden has emerged and quickly reached a large scale. Meanwhile, the bond market has become highly dependent on funding channeled through wealth management products. As a result, Chinese shadow banking is becoming slightly more similar to US shadow banking.

To help China watchers in their analysis of China’s financial underworld, overnight the Bank of International Settlements published a working paper mapping China’s shadow banking sector, which studies the “structure of the shadow banking system in China, focusing on the main activities and linkages with the formal banking sector.”

As the BIS explains in its abstract:

We develop a stylised shadow banking map for China with the aim of providing a coherent picture of its structure and the associated financial system interlinkages. Five key characteristics emerge. One defining feature of the shadow banking system in China is the dominant role of commercial banks, true to the adage that shadow banking in China is the “shadow of the banks”. Moreover, it differs from shadow banking in the United States in that securitisation and market-based instruments play only a limited role. With a series of maps we show that the size and dynamics of shadow banking in China have been changing rapidly.

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

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