Today we have stress tests of banks

 

              The UK  political classes have been mesmerised by the Murdoch saga. The all party agreement to the  motion to ask Mr Murdoch to withdraw his bid duly led him to do so.

           Meanwhile, outside the pressurised atmosphere of the debating chamber, the EU’s power brokers are locked in battle with each other, and with the markets. This is a much more gripping and crucial battle for all our futures. At stake is the future prosperity of our continent, and the future rights and duties of citizens in the many countries likely to advance further towards a federal union.

           Today, late in the afternoon, we expect the authorities to publish the results of the EU  stress tests for banks. These will show that some EU banks, probably in Spain, Germany and Italy amongst others, have low levels of capital relative to the risks they are running. If the EU sets a fairly high bar, more will fail the tests, worrying people. If they set a low bar, more will doubt the validity of the tests, worrying people.

            The last EU stress tests, which were analysed here, failed to point out that holding government bonds could be hazardous in the current climate and could lead to substantial losses if marked to their market values.  They did not satisfy markets, as many commentators and investors thought them too easy. The Irish banks all passed, and promptly got into difficulties.

             These new tests will draw attention yet again to one of the fundamental areas of weakness in the Euro scheme. Banks in weak countries have been made to buy and own too many domestic governemnt bonds, which are now sitting at large losses. EU banks generally have not been regulated to strict capital requirements. The European Central Bank has offered substantial assistance, as a Central Bank has to do, but some fear it will be held back when it needs to offer more bank  liquidity, and if it needs to continue its government  bond buying programme. If the regulatory authorities overdo the demands for more capital, it just slows the growth rates even more. This in turn cuts tax revenues and makes deficits worse.

          The enthusiaists for the Euro are now demanding that the EU makes more rapid strides to having an EU Finance Minister, proper enforcement of budget limits on each member state, and use of the EU credit card to borrow more money for individual countries using the credit status of the whole area. There are also frantic calculations of how much money should be transferred between the richer and poorer regions of Euroland to try to balance things up a bit.

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44 Comments

  1. Posted July 15, 2011 at 6:19 am | Permalink

    I don’t agree with the popular sentiment that (in John’s words) “If the regulatory authorities overdo the demands for more capital, it just slows the growth rates even more.” Obviously this sentiment is pushed for all it is worth by banks, but it is nonsense.

    Obviously stricter bank regulation of any kind (like higher capital requirements) will curtail bank activity, which, OTHER THINGS BEING EQUAL, will certainly curtail economic activity. But other things needn’t be equal.

    That is, economic activity can be funded EITHER by loans or by equity. If bank activity is curtailed, the relevant central bank can compensate by pumping out more central bank created money (monetary base). That means everyone and every business has more money in their bank accounts, which in turn means they need to borrow less from banks.

    Given that UK bank assets have expanded a whapping TENFOLD in last twenty years relative to GDP, I suggest a big clamp down on bank activity would do no harm at all.

    • APL
      Posted July 16, 2011 at 9:03 am | Permalink

      Ralph Musgrave: ” the relevant central bank can compensate by pumping out more central bank created money (monetary base).”

      You are advocating QE3?

      In actual fact the currency has been largely destroyed by successive governments since the beginning of the last century. There has been something like a 98% depreciation of the value of sterling.

    • REPay
      Posted July 16, 2011 at 4:22 pm | Permalink

      Good idea – debt finance is too dominant and has fiscal advantages in many societies…but getting the essentially statist countries of (Europe UK included) to become less reliant on debt finance is a huge task even in good times. One way might be to ensure that funded public sector pension schemes increase their equity exposure in the UK and that the increased contributions from current workers go into funds rather to pay existing pensioners. I don’t suppose our Ponzi Scheme public sector pensions allow for this…

  2. rose
    Posted July 15, 2011 at 6:42 am | Permalink

    Radio 4’s daily 3 hours of brainwashing is being witheld Today by a strike. I suppose they are exhausted after their succssful war against the competition. So it looks as if we won’t be hearing from dear Evan – or maybe even Robert – about this Today. In its place they have given us the delicious contrast of a repeat programme on the one woman oppostion in Burma.

    • rose
      Posted July 15, 2011 at 7:00 am | Permalink

      And now the BBC’s scabs are giving us a repeat programme on how the Bolsheviks put down the rebellion in 1921, beginning with what happened to the 5,000 Kronstadt sailors who burned their communist party membership cards in 1921. The glorious beginning of the official one party state.

      • rose
        Posted July 15, 2011 at 7:02 am | Permalink

        Oh dear, they are back after all. It seems they daren’t all go out on strike. The war against the competition must go on.

        • norman
          Posted July 15, 2011 at 9:41 am | Permalink

          I now resort exlusively to a couple of podcasts, half a dozen websites and a few magazines for my complete news intake.

          Has worked wonders for my blood pressure.

          The only thing I now listen to on the BBC is Test Match Special – my wife thinks I’m bonkers (as in all things she is correct) listening to it on radio when we have Sky but it is the one thing the BBC does that makes me feel my telly tax isn’t completely wasted. The cricket is almost incidental.

          • Tim
            Posted July 16, 2011 at 5:01 pm | Permalink

            I avoid all News and current affairs programmes from the Biased Broadcasting Corporation. Let the Guardianistas preach to their lefties whilst the rest of us gain our news from balanced sources. It’s time the BBC was privatised and we could choose to pay for it if we wished.

      • lifelogic
        Posted July 15, 2011 at 3:26 pm | Permalink

        The collapse of the EURO must surely be several million times more important than the odd phone interception by the news of the world and many other newspaper groups. Could the chair of the BBC trustees not do something to push the BBC in a sensible direction rather than endless dusk to dawn attack their competitors (who do not get the billions of tax payer money the BBC does).

        Oh sorry I forgot it is Lord Patten (of Brussels I think) so no hope of much positive there then!

        By forcing the banks to lend to the state they become just another tax gatherer for the state. So soon with NI, Income tax, misc duties, car tax, insurance tax, VAT, IHT, compulsory pensions, council tax, land fill tax, carbon tax, stamp duty, CGT, green energy tax and this back door banking tax it cannot be long before they get to over 100% of your income. Meaning that the only way to eat will be to work on the black market or leave.

        • norman
          Posted July 16, 2011 at 10:04 pm | Permalink

          There were rumours last year, and this is waaaaaay off the reservation but I give it some credence, that the government was considering taking off PAYE and NI at source before you got your money. Most people will think ‘this is what happens now’, but it isn’t – your employer holds this and pays it on your behalf every 3 months.

          The new system would have meant that your wages are paid to the government, then the government decides how much you should keep.

          Tyrannical, but I wouldn’t put it past a future government to implement this.

  3. Gary
    Posted July 15, 2011 at 7:13 am | Permalink

    How many stress tests have we already had ? What good did all the rest do ? If they were serious about stress tests why do they still allow mark to model accounting ?

    It is a farce, not to test the banks but to protect them.

  4. Mike Stallard
    Posted July 15, 2011 at 7:13 am | Permalink

    In an interview recently in the Spectator, two of the top journalists interviewed the Prime Minister who, as we all know, is a Eurosceptic. He thought that the European Union was not going to let the Euro project fail. Or words to that effect.

    The problem is terribly simple.

    Appointees are running the Euro. They need give account to nobody. They do exactly what they want when they want.

    There is absolutely nothing which any of us can do about it. It is as if we had just been conquered by a terrible enemy.

    • Alan
      Posted July 15, 2011 at 9:08 am | Permalink

      I bet the “appointees” who are “running” the euro wish they could indeed do “exactly what they want when they want”.

      In my view it is obvious that no one group is running the euro; what management there is consists of the outcome of negotiations between countries with independent and often opposing objectives.

      At the moment that is causing problems, but in the end it may turn out to be one of the strengths of the euro. Here in the UK we have no such indecision, and we wait to see if we do indeed benefit from that.

      • Mike Stallard
        Posted July 15, 2011 at 12:40 pm | Permalink

        They are indeed out of their depth – nobody doubts that. But who controls their decisions about how to mend the crisis?

    • D. Singh
      Posted July 15, 2011 at 10:29 am | Permalink

      The Prime Minister a Euroskeptic?

      Best of British luck.

      • forthurst
        Posted July 15, 2011 at 12:13 pm | Permalink

        The English use irony to emphasise a point.

        • Sok Draw
          Posted July 17, 2011 at 9:57 am | Permalink

          Please, do keep up!

  5. lindsay McDougall
    Posted July 15, 2011 at 8:07 am | Permalink

    Now is the time to DEMAND that the five pigs leave the Euro zone. Germany will never agree to the Euro becoming a weak currency. If the German Chancellor allowed that to happen or threw lots of money at fiscally incontinent nations from southern latitudes, she would quite rightly be kicked out by her electorate. So we have deadlock and looming default.

    As for the banks, if you are willing to let them crash and burn you don’t have a regulatory problem. Don’t depositors have ANY responsibility to safeguard their own interest? We should never forget that MANY financial analysts believed that RBS’s conduct was reckless, ever since the time that they made a highly leveraged takeover of NatWest in 2001.

    • EJT
      Posted July 15, 2011 at 1:39 pm | Permalink

      Para 1. Disagree. Democracy is not having the choice of throwing people out of office. It’s having the choice of replacing them with others who will implement different policies. It’s not clear that the Germans have this choice. It is clear that the Greeks at present don’t.

      Para 2. Agree. When the problem is insolvency, the solution is bankruptcy.

      • lifelogic
        Posted July 15, 2011 at 7:20 pm | Permalink

        Agreed the UK too never has the choice to elect different policies or even politicians who will do what they promise anyway or can even do it – with the EU above them issuing the orders.

        Democracy in any real sense it simply is not.

        • APL
          Posted July 16, 2011 at 9:13 am | Permalink

          lifelogic: “Democracy in any real sense it simply is not.”

          And our MPs are in on the con.

          It’s largely our fault, during relative affluent times we have allowed the political class to develop and foster its own agenda, as time has gone by their agenda and our own best interests have followed different paths.

          Because of the ‘good times’ nobody much cared.

        • APL
          Posted July 16, 2011 at 9:18 am | Permalink

          As if by magic the Independent has a story on the incestuous relationship between the leader of the Tory party and the (lowgrade-ed) press.

          http://www.independent.co.uk/news/uk/politics/revealed-camerons-26-meetings-in-15-months-with-murdoch-chiefs-2314550.html

  6. Javelin
    Posted July 15, 2011 at 8:13 am | Permalink

    The stress tests could throw a spanner in the works – but as far as I can tell it’s going to be a few sacrificial lambs to try to give a good impression. Firstly the stress tests don’t test sovereign debt – because of the assumption that the ECB says “non to defaults” – which makes them a joke in the current context. Secondly a couple of weeks after the last stress tests Irish banks needed a bail out.

    If the Irish bail out is anything to go by I see the stress tests as all the banks holding their stomachs in during an inspection parade. The moment the sergeant turns his back the squaddies will all breathe out. So I expect stress tests to be the end of a period of subterfuge rather than the start of a period of stability.

  7. lojolondon
    Posted July 15, 2011 at 8:27 am | Permalink

    This is crazy – there is not one piece of good news for the UK here –

    Naturally I guess when they calculate the ‘transfers’ in this Euro scam, they will not consider that with the size of our national debt that we would be one of the poorer nations, so would benefit from a cash transfer from the Eastern countries.

    Remember, they all hate us, and see us as a cash cow, nothing more, so whenever something is initiated, the UK is always the loser.

  8. Damien
    Posted July 15, 2011 at 9:45 am | Permalink

    The tougher stress tests results will provide considerably more reliable information for investors, regulators and governments as to the true state of banks in the region. The trading books of the banks were not included in the tests so caution remains.

    Greater capitalisation requirements will not necessarily hold back growth. The system is awash with cash and companies have never held more cash than now. Looks at the size and frequency of some of the takeovers and bids. What is holding back the economy is lack of confidence to borrow and invest. Until there is confidence investors will be wary of allocating capital. These stress tests are one small building block in the recovery of confidence in the system .

  9. Posted July 15, 2011 at 10:42 am | Permalink

    These tests are being conducted by EU officials who are adamant that the Euro will never fail and no Euro country is ever going to default. One must assume therefore that, in conducting the tests, they didn’t even bother to consider these possibilities, so one must ask whether the results will be worth the paper that they’re written on.

    I may not understand high finance, but the thing that strikes me is that some of the banks are doing what no small saver would do, putting too many eggs in one basket. In the case of the European banks, a very large part of their assets seems to be European government bonds, whereas common sense seems to suggest to me that if government bonds are the bank’s chosen investment, they should at least have a worldwide spread.

    • lifelogic
      Posted July 15, 2011 at 7:24 pm | Permalink

      Yes anyone who advocated the current EU rules for the EURO, the ERM, CAP, the common fishing policy, uncontrolled movement of people and the absurd, gender blind, insurance premium plans is not fit to judge anything and certainly not the banks.

  10. NickW
    Posted July 15, 2011 at 10:59 am | Permalink

    Transferring money from richer to poorer regions creates stagnation and dependency in the recipient country or area, and resentment in both donor and recipient area.

    It is just large scale socialist redistribution which does far more damage than good.

  11. StrongholdBarricades
    Posted July 15, 2011 at 11:05 am | Permalink

    If any of our banks fail their stress tests could we have a lottery to see which member of the public could cut the ceremonial ribbon and condemn them to liquidation?

  12. Alison Granger
    Posted July 15, 2011 at 12:37 pm | Permalink

    Every big policy of the EU has been a total disaster- fisheries, agriculture, euro and all the little ones nearly as bad, now they’re desperately calling for more controls and bureaucracy. The prospect of the Euro collapsing has sent them all madder than they were already with the possibility that tens of thousands of useless Eurocrats might have to get a productive job in competition with people that actually can find their backside with both hands. In reality they’ll probably just give themselves enormous pensions and retire to what’s left of Greece.

  13. Posted July 15, 2011 at 12:44 pm | Permalink

    The BBC’s manipulation of the news, devoting most news airtime and almost all current affairs programmes to Murdoch, because they wanted to prevent him expanding Sky and providing a real competitor to their effective monopoly has been disgraceful. No less disgraceful because it has worked. Murdoch has not been the only, or indeed worst practitioner of hacking but the BBC airbrushed everybody else out of the news & naturally the other papers went along with it.

    If the BBC can do this then they have proven themselves to be too powerful to be trusted and to have no concern for their legal due of “balance”.

    • EJT
      Posted July 15, 2011 at 4:45 pm | Permalink

      Murdoch is looking for a new takeover target. What is there not to like ?

    • lifelogic
      Posted July 15, 2011 at 7:26 pm | Permalink

      I agree fully.

  14. Javelin
    Posted July 15, 2011 at 12:51 pm | Permalink

    The rebalancing issue you raise at the end is interesting for Scotland. If they hold a referendum what is the SNPs view going to be about the Euro or Sterling in the long run?

    Clearly the Euro would be a disaster for Scotland – in the same way it has been for Greece. Without “Le Forumla Barnett” they would have severe cut backs.

    • norman
      Posted July 16, 2011 at 10:08 pm | Permalink

      Scotland paid 9.6% of British taxes in 2009. We received 9.4% of British spending.

      The old Barnett formula means that the English are subsidising the Scots is a myth. The truth is, at the moment, we are all being subsidised by massive borrowing. That the Scots somehow seem to think this is a good thing is completely bizarre, I agree, but the English are quickly entering the same boat so I wouldn’t get too high and mighty about it.

  15. Martin
    Posted July 15, 2011 at 1:14 pm | Permalink

    Your analysis appears to blame everything on the Euro.

    The Pound Sterling is also overburdened with bank debt. Indeed once the over valued housing market chickens come home to roost I suspect the UK government’s borrowing costs will do a Greece as our national debt (including banks!!) is already sky high. Will the next sterling crisis be the last sterling crisis?

    Part of the trouble the banks have is that much free capital is heading to China. Why loan to a bank in the UK, Ireland Italy etc when you can invest in a nice factory in China with say the same risk and a better return?

    • forthurst
      Posted July 15, 2011 at 7:25 pm | Permalink

      “Your analysis appears to blame everything on the Euro.” You appear to have dffficulty in understanding this blog. What has the parlous state of this country’s economy as a result of the reckless policies of the Labour government coupled with the prediliction of vainglorious (managers-ed) in charge of UK ex-building societies, easy meat for international financial spivs with strength in depth in (questionable-ed) dealing posing as American banks selling collateralised…. mortgages got to do with PIIGS whose economies are unable to cope with a strong currency, especially if their entrance to the currency was facilitated by one of those spiv outfits?

  16. Bob
    Posted July 15, 2011 at 1:38 pm | Permalink

    Isn’t it time we made election manifestos irrevocable?

    • norman
      Posted July 16, 2011 at 10:10 pm | Permalink

      It’s about time we held politicians accountable but the present system precludes this.

  17. Damien
    Posted July 15, 2011 at 2:14 pm | Permalink

    “There are also frantic calculations of how much money should be transferred between the richer and poorer regions of Euroland to try to balance things up a bit.”

    John we have been doing this in the UK as long as Labour were in power. It did not work very well here and it won’t solve the structural inadequacies in the periphery of Europe.

  18. Gary
    Posted July 15, 2011 at 8:31 pm | Permalink

    If they were serious they would do the ultimate stress test, open the banks books to the markets. They would make the derivatives be moved from OTC into open exchanges. All offshore SIVs would have to appear on the books. In other words expose their business fully to the market.

    That they don’t means they don’t think the banks could survive such disclosure. So they devise half baked stress tests as some socialist contrivance. In the end the markets will get at the truth in any case and the charade will blue up.

    • Mark
      Posted July 15, 2011 at 11:13 pm | Permalink

      “Open” exchanges are actually disguise mechanisms: only the privileged guardians of the exchange have access to counterparty positions – the very opposite of transparency. Because the exchange stands between every trade even the original counterparties are unaware of who is the other side of their business. You then depend on the exchange to act as an effective regulator: mostly, it does this by favouring deep pockets who can finance additional margin calls regardless of the real merits of their positions. This is unsatisfactory, and can lead to market manipulation.

      Counterparties who have bilateral trade positions can note whether a particular competitor seems to be building up a dangerous pool of risk on one particular side of a market. They are in a position to ask questions and to limit trades with counterparties accordingly.

      The real key is transparency. If I invest in a manufacturer I will have data on its plant capacity and trends in its input costs, sales volumes etc. that allows me to model its profitability. If they hedge certain risks to exchange rates or commodity prices, this will usually be clearly signalled in the accounts. The lack of information and proper consolidation in banking means that such modelling is impossible.

  19. Posted July 16, 2011 at 12:37 am | Permalink

    Anyone who has a friend or relative working at or connected to the Bolshevik BC do as I have firstly call them Commissar and then proceed to lecture them as to why you now consider them Persona Non Grata,I have done so to a niece and ……ed her father when he complained
    also called in my £4000 loan to him,and told him no more loans EVER even if he ends up on the street,told him also to in turn bollock the daughters employer who works at the KREMLIN
    in Sheppards Bush.

  20. APL
    Posted July 16, 2011 at 8:52 am | Permalink

    JR: “we expect the authorities to publish the results of the EU stress tests for banks.”

    The results are a joke!

    The real stress test will be the ECB which has taken onto its balance sheet all the worthless trash from Greece, Portugal and Spain and is now faced with the same from larger economies.

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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