Interesting note this morning from DB about ECB policy review and money market rates. Let me summarize it.
ECB has de facto moved from a corridor system to a floor system with unlimited MRO + QE.
But as QE etc unwind, there’s a big risk lurking. A thread
For those unfamiliar with the jargon, a corridor means that the market rate (EONIA) is stuck between two policy rates, the deposit facility rate (DLF) and the marginal lending rate (MLF.)
That’s what it looked like before 2008 & the GFC.
(Market rate is yellow)
After all hell broke loose in '08, the ECB flooded the market with money and this is what it looked like: market rates were stuck at ECB deposit rates because there was too much money in the system and it had to be deposited back at the ECB (ECB money is just doing round trips).
My 2 favorite docs are the Jap & Ger financial stability reports because they give a glimpse at the horror of small unlisted banks😁(don’t sue me, I’m just kidding).
What did we get from the new German one ?
Buckle up, as they say in 10,000$ a year doomsday newsletters.
You won’t believe it: CRE is in trouble – but tbh office is surprisingly resilient so far.
Ok, CRE is fun, but have you tried interest rates risk and bn of securities unrealized losses in the balances sheet?
Realised is 25.8bn so total is around 70bn€. Tbh this is also not that much compared to the US shitshow.
With all the macro debates going on around rates, recession, CRE, etc, banks’ loan losses are obv key. They are what makes the diff between recession & depression imo
That’s why the EBA report on banks’ provisioning practices is key – Here are my main takeaways.
1) Stage 2 loans (i.e. deteriorating loans for which lifetime expected credit losses = ECL should be booked) are a total mess. There's no consistency in methodologies. Here are the main problems
Collective assessments are still lacking (but are compulsory under IFRS9)
A few comments on the Metro Bank situation & capital rausing plan announced yesterday evening.
I'll start with a quick recap and then what I think it means for Metro and (more importantly) for the sector.
The deal has four components:
- Haircut of 40% on Tier 2 debt + extension of the 60% left, but voluntary, not bail-in
- Extension of MREL debt to 2029 (+4y) and new MREL issuance at 12%
- 150m new equity at 30p (IPO was at 2190p…)
- Planned asset sale of 3bn of resi mortgages
Now, what I think is important:
1. last minute rescue plan of MREL bondholders, shareholders are wiped out and T2 debt gets a mixed deal but the bonds were trading at 30%.
2. We might get retail s/h litigation / misselling claims
IFRS & bank regs are almost killing bank M&A - something the Brits might regret in the next few days 😉 & the SSM might consider unintended consequence !
Here's why.
Let's take a simple bank with loans & deposits. Regulations (IRRBB) and common sense mean they can't massive interest rate riskj, so on top you add some rates derivatives to hedge.
Floating loans have an easy IR profile, mortgages are more complicated profile (fixed rate, prepayment risk). Deposits are much more complicated: sight deposits are not really floating not really fixed, so the hedging is complicated and requires modelling.
The ECB just published an economic bulletin on banks’ distributions, and I’m still puzzled as to why the ECB is so obsessed with this and constantly fight payouts.
So a thread about bank dividends !
My commonsense view here is that the EA banking sector is trading at unhealthy P/B ratios & it’s both in the banks’ and supervisors’ interests to see them go up.
But it looks like the ECB disagrees.
Again, commonsense view is that the best protection against financial distress is to be able to raise capital when you need it... and you’re only able to do that if you have an equity story to sell to investors.
If you can’t even distribute your earnings, it’s a tough sell.