Banks are required to hold capital relative to their assets (loans).  Different types of loans have different capital requirements, Banks turn to financial alchemy in search for capital So the safest securities, such as US Treasuries, do not count as assets at all for the ratio, but the riskiest – such as long-term structured credit assets – count at double their stated value or more. The result is that banks and the most outspoken hawkish banks are quite outspoken about it are actively managing their balance sheets to minimise capital requirements resulting in a classic case of unintended consequences and … Continue reading RWA (Really Weird Accounting) otherwise known as Risk Weighted Assets

We are getting closer to the dose of reality in Europe, and it is becoming abundantly clear why it is taking Germany and France so long to decide.  Once you start looking at write offs of 60% it is s slippery slope to a) more than 60% on the thinking that can Greece even repay the 40% remainder, and b) write offs for other Euro countries. EU looks at 60% haircuts for Greek debt The financial effect is to raise the amount required to $252 Bn versus the $109 Bn predicted earlier. For impacts to consider, here are a couple … Continue reading Banks prepare for the impacts of sovereign debt write offs in Europe

Rogoff is one of the clearest thinkers out there when it comes to understanding the current western economic situation following the financial crisis of 2008.  If you don’t have the time to read “This Time is Different” or this paper (written early in 2008 before Lehmans), but want to understand why the US and Europe are in such rough shape a mere 3 years later, then read this interview transcript.  Understanding the Second Great Contraction – Rogoff Kenneth Rogoff: The historical experience gives a very clear view that the aftermath of a financial crisis brings  slow and halting growth, sustained … Continue reading This Time is Different–McKinsey interview with Kenneth Rogoff

Bank of America continues with apparently moves that can only be characterised as desperate.  This one involves some $70 Trillion in derivatives.  Yes that number is correct, with a “T”, and it could (to be confirmed) represent some 10% of all derivatives in the world.  This is astounding. BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit | Bloomberg Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation. As commented … Continue reading Bank of America looking increasingly vulnerable

Phase 2 of the banking crisis continues to circle.  We already know about the sovereign risk issues in Europe and now the soft employment and economy in the US is showing as deteriorating consumer credit signals warning of more bad debts for US Banks. Improvement in US mortgage delinquencies ends Citi cut bad loan reserves, but said that was due to improvement on credit cards rather than mortgages. “We haven’t been releasing reserves against the US residential mortgage portfolio,” said Mr Gerspach. “I would look at that as still being the most significant risk that any US bank currently faces.” Continue reading Signals of deteriorating bad debt trends for US Banks appear

The penny has dropped.  We are in a period where the only way out is deleveraging otherwise known as debt reduction.  Yes it will be painful but its more painful watching bankers whining to governments to protect themselves.  We are in a state of flux where the only solution is debt reduction.  This can happen in only one of a couple of ways.  One is debt write offs and the other primary one is inflation.  However all countries cannot inflate at the same time. EU banks could shrink to hit capital rules | ft.com Another top banker said: “It’s fundamentally … Continue reading The Great Unwinding is coming closer to the Endgame