As always, the @ecb 's FSR is a treasure trove of information. Here’s a thread with my top 10 charts in the report and why I think they’re interesting. (No special order). 1/13
Investor sentiment on CRE
What’s interesting here is that the last time sentiment was 20% “at through”... the market was actually at a through! But since 2015, “peak” sentiment has been growing, and so have prices.
Regressing bankruptcies rate and GDP: this spectacular chart tells the economic story of Covid better than 1000 words: losses have been “socialized”, banks & SMEs have been shielded. I think we won’t get back to the regression line simply bc losses have already been transferred.
CFD/Equity TRS volumes. This chart is absolutely insane because, let’s be honest, equity TRS/CFD are widely used by retail investors to take exposure they absolutely don’t understand.
This chart is important because it shows that the ECB is still desperately trying to find reasons to worry about asset quality, despite excellent bank results. This time it’s the uptick in forborne loans. It’s hard to share their concern.
Always nice to have an up to date view on moratorium, this from Feb 2021. The huge default rate in Ireland is worrying and Portugal is clearly the country where risk remains largely unknown.
Let’s look at what contributed positively (in green) to changes in bank profitability and what contributed negatively (in red.) You can’t seen any green? Yeah, me neither. But banks are up 27% this year! Can you spell forward looking?
And the reason for that is in this chart – also a key item for the SSM, the ECB’s supervisory arm: profitability is expected to rise sharply. But look at that big orange bar! Cutting costs will be crucial. Social costs + execution risk = be careful.
This chart is extremely puzzling.
Credit risk RWA increased sharply in Q1.. then fell. This can’t be because ratings improved. Public guarantees were supposed to cover new loans, but I suspect what we see here is that banks have been offloading risks on the governments.
The right part of the chart is really for people who mock internal models: at least, those models didn’t say credit risk is going down during the biggest macro shock in a decade!
Really puzzling difference between IRB/SA
Just a fun chart on data which is hard to find: what kind of alternative assets do insurers buy?
Real estate, real estate, oh, and real estate. Also a bit of loans. All veryyyy liquid 😊
And the last one, on a major but geeky topic. Banks with a small capital buffer were VERY reluctant to use their buffers, despite reinsurances from supervisors that they could do so.
Maybe they didn’t believe it, maybe they didn’t see a quick path to restore buffers post crisis
Anyhow, this puts the topic of MDA on the table again – and AT1 investors should really watch this, it could be a game changer.
Go read the whole thing, it's really good!
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An old theme is coming back to haunt them: Basel 4!
Quick thread.
After almost 10y of discussion the package was finally enacted with full implementation in 2033.
Everyone felt, after many EBA reports & banks' disclosures, that impact would be mild.
But for first time banks are publishing capital ratios w/ the new rules and for DB it's ugly
How does it work? Banks are still allowed to use internal models, but the RWA (in 2030/2033) must be at least 72.5% of the standard (non internal models) RWA. ("output floors") and for DB that's a 33% increase!
CET1r would go from 13.8% to 10.35%! Ouch!
Why is the latest EC proposal on securitization a big deal for banks and how does it change the SRT market?
A slightly geeky thread - with some backround on the SRT market if you're not aware of this important market.
First what’s a SRT?
Following secular finance practice of reinventing the wheel but changing its name, the new trendy capital optimization transactions are “significant risk transfers”, but they’re just good old securitizations (invented in the 1860s 😊.)
(cash or synthetic)
The reason they’re now called SRT is a regulatory one.
The 2013 CRR (Art 244/245) allowed banks to get capital relief under some conditions, essentially that “significant risk” was transferred to someone else.
Bloomberg has some nice charts on the tariffs’ impacts.
The first one argues that tariffs on China are coming globally: too many countries will see a spike of imports from China & that's not sustainable.
The second shows GDP impacts, taking into account direct effects + indirect via trade partners (using a WTO macro model, so, you know...)
SE Asia impact is massive, -1% for EU, -1.3% Japan and -2.5% Korea. Mexico bonanza.
Some details on who’s going to stop which exports – very interesting split (especially if you try to model loan losses 😊). Overall 30% drop in US imports of goods (with retaliation modelled as 50% of US). China is -85%, Vietnam -75%, Taiwan, Japan, Korea Thailand -50%, EU -40%.
A week ago the Swiss gvt bravely decided to leave the decision on UBS capital requirement to Parliament.
I’m not sure that was such a great idea – as the recent proposal of the Swiss Social-Democratic Party shows.
If implemented, it would be a massive game changer. A thread.
First, a reminder: the SDP is not a fringe party, they’re #2 in the National council (41/200) & #3 in Council of States (9/46) & they’re also not particularly extreme (I mean, Swiss rarely are.)
But their proposals for UBS are a bit wild.
Let’s unpack.
1) A new leverage ratio surcharge of 3% for assets >300bn$ - in practice it means 40bn$ more capital required (out of approx 85bn of equity).
Ouch.
And having the biggest req on a non-risk adjusted basis is not exactly a very safe approach imho