The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘banks

Concern over banks and ‘dark pools’ reaches G20

A new concern has arisen over the growth of ‘dark pools’ or private unregulated trading exchanges, where banks and large investors are trading derivatives off balance sheet. IT is significant enough to have come to the attention of this weeks G20.

Exchanges issue warning on spread of ‘dark pools’ |

The world’s stock and derivatives exchanges on Tuesday warned the Group of 20 leaders that the continued “proper functioning” of their markets could not be taken for granted because of a proliferation of alternative trading venues such as “dark pools”.

This is relevant because the near $ 1 trillion in worldwide derivatives remain a risk to some banks’ stability and survival. One company which failed because of derivative exposure was Lehman Brothers last September, and fear of another was part of that which brought us to the ‘too big to fail’ problem.

Written by Colin Henderson

September 23, 2009 at 16:03

Trends that lead to lower growth, lower profits and lower volatility for banks than during the past few decades | Deutsche Bank

This paragraph from the report below, succinctly summarises the growth prospects for Banks, and the backdrop to planning. Again, a plan that looks like the plan for 2007 is destined to fail. This is the time for breakout product design, and a dramatic cost reduction through shift to reliance on internet and online banking for a far greater breadth of service delivery.

Global banking trends after the crisis | Deutsche Bank Research

Lean years lie ahead for US banks. Performance improvements during the last 15 years have often been due to strong lending growth and low credit losses. As private households reduce their indebtedness, revenue growth in some European countries but especially the US may remain depressed for several years. With weak loan growth and a return of higher loan losses as well as a fundamentally diminished importance of trading income and modern capital market activities such as securitisation, banks may be lacking major growth drivers.

global banking trends after the crisis

Written by Colin Henderson

September 2, 2009 at 22:19

World Safest Banks are European, Canadian and Australian

The worlds safest banks are European, Canadian and Australian.

WORLD’S 50 SAFEST BANKS 2009 | Global Finance Magazine

New York, August 25, 2009 — With bank stability still high on corporate and investor agendas,Global Finance publishes its 18th annual list of the world’s safest banks. After two tumultuous years that saw many of the world’s most respected banks drop out of the top-50 safest banks list, the dust appears to be settling. Those banks that kept an iron grip on their risk exposure before the financial crisis blew up have consistently topped the table and maintain their standing among the top echelon in this year’s ranking. At the same time, the big name banks that lost their safest bank ranking during the credit crunch are still absent from the list as they struggle to rebuild their credit standing. The “World’s 50 Safest Banks” 2009 were selected through a comparison of the long-term credit ratings and total assets of the 500 largest banks around the world. Ratings from Moody’s, Standard & Poor’s and Fitch were used. Global Finance has published its “World’s Safest Banks” listing for 18 years and this ranking has become a recognized and trusted standard of creditworthiness for the entire financial world. “It’s been a bumpy two years for the rating agencies and many of the banks they evaluate,”says Global Finance publisher Joseph D. Giarraputo. “More than ever customers all around the world are viewing long term creditworthiness as the key feature of the banks with which they do business.”

Written by Colin Henderson

August 30, 2009 at 22:22

Posted in Uncategorized

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Canadian Banks have a Productivity Gap relative to the US

Following up on the previous post covering the Bank of Canada’s view that Canadian Banks do not have a productivity gap [pdf 19 pages] relative to US Banks, here is the basis for that contention within a 2006 report.

The conclusion copied here in whole is in my view, woefully misleading and contradictory. It reads to me like someone with political motivations has turned facts into something that meets policy objectives. Analysis to follow.

This work examines the efficiency and productivity of Canadian and U.S. banks in three ways.

First, we compare key performance ratios and find that (i) the average Canadian bank employee produces more assets than the average U.S. bank employee, and (ii) in terms of producing net operating revenue, Canadian and U.S. bank workers are similarly productive.

Second, we investigate whether there are economies of scale in the cost functions of Canadian banks and a sample of U.S. BHCs. We find larger economies of scale for Canadian banks than for the U.S. BHCs. This suggests that Canadian banks are less efficient with regard to the scale of their operations and would have more to gain in terms of efficiency benefits from becoming larger.

Third, we measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic
best-practice institution). We find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs, and that they have moved closer to that efficient frontier over time.

Overall, these results do not suggest relative efficiency or productivity gaps in the Canadian banking industry. On the contrary, Canadian banks compare generally favourably.

Finally, as noted above, legislative and regulatory changes have benefited efficiency in Canadian financial services. This shows the importance of removing any remaining restrictions that inhibit competition and efficiency, but provide little (or no) benefit in terms of financial soundness.

Some facts from their report:

  • Expense ratio Canada – 67 cents per dollar of revenue
  • Expense ratio US – 59 cents per dollar of revenue
  • Assets per employee Canada – $6.1M
  • Assets per employee US – $4.1M
  • operating revenue per employee US/ Canada same at $0.3M

This from the report:

Our analysis indicates that the difference in the expense ratios can be currently attributed to a higher labour cost component (wages and benefits) at Canadian banks. However, this differential does not imply disparities in productivity, which concerns how much output is produced per unit of input (typically, labour).

Relevance to Bankwatch:
Translation. Bank of Canada views Canadian Banks as productive by taking the narrow view of relative employee output. However that view excludes the overall budget of banks that includes real estate, and technology. The latter points explain the overall expense disparity per dollar of revenue earned at a significant 8 cents.

In other words productivity is a measure of investment not of employees. That is the entire point of automation. This further explains the contradictory point in he Tim Lane Kingston speech that wrote off StatsCan concerns for Canadian Bank productivity.

Productivity is a measure of inputs (expenses) and outputs (revenue). Any narrower view does a disservice to the country and the Banks, covering over potential areas for concern. Banks in Canada cover a large geography with relatively small population and while internet adoption is high the related savings in real estate and technology efficiency have yet to be achieved.

Written by Colin Henderson

August 29, 2009 at 17:25

Posted in economy

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The lesssons of the credit crisis are not being taken seriously by markets

I have been following the matter of bank leverage, and the improvements that are required to deal with current bad debts and more importantly future bad debts that will arise from credit card and mortgage defaults. Sadly no lessons have been learnet judging by the reaction from the investment analyst community to the small improvement in capital ratio at Goldman Sachs.

Banks still need bigger cushions | Reuters – Rolfe Winkler

It was a surreal moment two weeks ago when analysts on Goldman Sachs’ earnings conference call pressed CFO David Viniar to jack up leverage. They seem to think that the worst of the credit crisis is behind us, so Goldman should goose its risk profile to increase returns. This is remarkably short-sighted.

Clearly the relationship to recent TCE (Tangible Common Equity) levels is hardly the point. What ought the TCE level be now based on the expectations for the next few years?

Yes, leverage is down, but only relative to the obscene levels reached a year ago. Measured by tangible common equity, the biggest banks are still levered over 20 to 1. If banks learn nothing else from the financial crisis, it’s that they should err on the side of prudence, carrying substantially more capital than appears necessary.

In fact this little tidbit is interesting.

A nickel of equity for every dollar of assets is a pathetically small capital cushion. When the Federal Reserve system was founded, the required cushion was 18 cents. Ever since, we’ve been marching toward zero, pumping more credit into the marketplace than can be prudently managed.

At 18 cents leverage would be 4.6 :1 … that is still excessively high relative to coorporate leverage but perhaps it could be argued based on strong profit margins of banks. In any event it is hard to argue for anything less. Then we must layer on the continued practise of off-balance sheet debts which are not incluuded in TCE calculations, and which of course mean leverage is actually worse than shown.

In the meantime, banks are using various accounting gimmicks to hide leverage. For instance, Citigroup and JP Morgan Chase have $165 billion and $145 billion of off-balance sheet assets, respectively, that will have to come back on their balance sheets next year. Taking account of them now would reduce their TCE ratios by 8 percent and 7 percent, respectively. Bank of America has $470 billion of off-balance sheet assets, though they haven’t disclosed what will end up on the balance sheet.

Written by Colin Henderson

July 30, 2009 at 11:44

Future for many banks remains grim | Roubini

This interview with Roubini, on a visit to China, is wide ranging, and provides a good assessment of where we are in the economic cycle, why we got here, and importantly what to expect next.  In particular this assessment on US banks is sobering.  That aside, it is a worthwhile read.

Dr. Doom Has Some Good News

The first involved banks. Like Paul Krugman and others, Roubini had been warning that many banks were weaker than they seemed. Rather than trying to nurse them along, he said, the government should move straightaway to nationalization: “I’m concerned that we’re not going to deal with the bank problem as we should,” he said. “Some banks are insolvent. To prevent them becoming zombie banks, the government should take the problem by the horns and, on a temporary basis, nationalize them. Take over these banks, clean them up, and then sell them back to the private sector. Not doing that is one mistake we may make and regret.”

Written by Colin Henderson

July 3, 2009 at 09:04

Posted in economy

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US releases draft regulatory framework for Financial Institutions

The US administration released a draft of their proposed regulatory framework today, putting the Federal Reserve front and centre.

The big theme is to promote broader control of any institution involved in banking, and to specifically eliminate exemptions such as the Thrift Charter.

Draft Fed report on Financial Institution Regulation pdf – 85 pages

Written by Colin Henderson

June 17, 2009 at 09:05

Posted in regulation

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Eurozone banks face $283bn writedowns| Report

Europe and the ECB are slow with dissemination of analysis and information when compared to the IMF, US and UK.  But when they do, here is 226 pages of analysis that tells us Euro Banks will write off $283 Bn over 2009/ 2010.

More to come after I get a chance to digest, but meantime here it is for your reading pleasure.  They key is the general deterioration and reduction in forecasts since last in December 2008.

ECB Financial Stability Review pdf

The further significant deterioration of global macroeconomic conditions since the finalisation of the December 2008 Financial Stability Review as well as sizeable downward revisions to growth forecasts and expectations have added to the stresses on global and euro area financial systems. The contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets.

Connected with this, there has been a signifi cant increase in the range of estimates of potential future write-downs and losses that banks will have to absorb before the credit cycle reaches a trough. Although there are great uncertainties surrounding such estimates of probable losses and of the  outlook for banking sector profi tability, the scale of estimates of potential write-downs has weighed on investors’ confidence in the resilience of already-weakened financial institutions. Refl ecting the challenges confronting the euro area banking sector, funding costs have remained elevated, the market price of insuring against bank credit risk has continued to be very high and the market value of many banks’ equity has remained significantly below book value.

Eurozone banks face $283bn writedowns | FT

Eurozone banks face additional losses of more than $283bn this year and next as continental Europe’s severe recession intensifies strains on its financial sector, the European Central Bank has warned.

The fates of the eurozone economy and its banks have become increasingly interlinked, the ECB reported on Monday in its latest “financial stability review” with banks losses expected to be focused on their loan exposures. Risks to the stability of the financial sector remained high, it said, while “uncertainty prevails” over the shock-absorbing capacity of the banking system.

Written by Colin Henderson

June 15, 2009 at 23:32

Posted in Europe

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As predicted the consequence of government ownership is significant

A US regulator on Friday predicted that chief executives and directors of some of the banks that underwent the stress tests could lose their jobs,

Regulator expects bank chiefs to lose jobs | FT

By Francesco Guerrera and Nicole Bullock in New York

Published: May 16 2009 00:10 | Last updated: May 16 2009

A US regulator on Friday predicted that chief executives and directors of some of the banks that underwent the stress tests could lose their jobs, in another sign of the government’s desire to have a say in the running of bailed-out companies.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said the authorities could replace management and boards at some of the 10 banks that were ordered to add fresh capital after the tests.

“Management needs to be evaluated,” she told Bloomberg television. “Is this the right skill set? Have they been doing a good job? Are there people who can do a better job?”

Asked whether some chief executives and directors would be replaced when banks present their capital-raising plans in the next few weeks, she said: “Yeah, I think there will be an evaluation process. We’re requesting it as part of the capital plan.”

Written by Colin Henderson

May 16, 2009 at 22:19

Posted in Uncategorized

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“A banking system we can trust” | Forbes

An interesting proposal outlined in Forbes by Laurence J. Kotlikoff and Edward Leamer.

The proposal is to eliminate bank failures by managing lending at banks through funds provided by mutual funds.  This would place all the risk with the holders of the funds (investor customers who lend money) and gain the risk advantages of a Mutual Fund.  Loans would be funded when the Mutual Fund provided the money.

I find this particularly intriguing because this is basically the P2P lending model as it is now playing out, with sophisticated investors providing the funding directly to borrowers – P2P Lenders providing the platform and lending system to make it happen.  Pertuity Direct in fact use a Fund as their lending supply source.

Here is the link to Forbes.  Story courtesy of icontract – (thanks Nishad).

Written by Colin Henderson

May 6, 2009 at 08:31

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