JohannesBorgen Profile picture
Jun 30, 2021 8 tweets 5 min read Read on X
Even if the @EBA_News headlines tries its best, it’s hard to find bad news in their latest risk dashboard on European banks: capital is up, NPLs are down, profitability jumped sharply…
@EBA_News When you think about it, it’s crazy how the Covid fears were exaggerated (more on why below.) I mean, look at this: even the most affected sector only saw a very modest rise in NPLs. A 25% scenario would not have been absurd! We're barely at 9% vs 8% in Q1 2020.
@EBA_News Payment holidays on loans are in freefall, with meaningful # only remaining in Spain, Italy or Portugal.
@EBA_News And what’s happening to expired ones? Can borrowers repay?

Well, there are NPLs, of course, but tbh the amounts are very modest and way lower than expectations from a year ago.
@EBA_News So can we find bad news?

Yes, I’d mention two important ones.
@EBA_News First, losses are starting to bite in the public sector.

Those guaranteed loans will cost a lot of money.

It’s a jeuasommenulle after all (=zero sum game)!

While banks’ NPLs are going down, the government ones are going up – sharply !
@EBA_News And the second bit of bad news, courtesy our good friend the ECB: look at the net interest margin ! It’s in freefall!

This can’t last forever, even with all the creativity of the ECB (tiering, TLTROs, etc.)
@EBA_News But of course, all this is very important but the absolute worst thing is that…

For the first time, UK data is gone ☹ #Brexit

I’m probably the only one in the world who cares, but I do care !

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More from @jeuasommenulle

Jul 2
France is famous for wine, cheese, Versailles, football… and credit ratings.

Today I’m going to tell you how French banks will save billions of capital thanks to an old institution & a magic trick

Read till the end, it’s the wonderful story of a ruling worths tens of billions
Let’s go back to Deutsche Banks’ recent disclosure that Basel 4 will cost them 15bn of capital (with 13% CET1r assumption).

See linked thread:

It all boils down to the fact that under Basel 4 banks will have to calculate their risk exposures using the max of

i) their internal models’ calculations and

ii) 72.5% of the “Standard” (=supervisory) models, also called the output floor.
Read 16 tweets
Jun 30
Why is Deutsche stock hammered today?

An old theme is coming back to haunt them: Basel 4!

Quick thread. Image
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! Image
Read 4 tweets
Jun 23
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) Image
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.
Read 15 tweets
May 23
Are you readyyyyy for LDI take 2?

Hear me out. Something’s brewing in the UK Gilt market.

#LettuceLiz Image
As the chart above shows, the cash swap spread has moved significantly & one-way recently.

Spread to swap is now 50bps.

But EU & UK insurers book their liabilities at NPV using swap curves, not UKT curves.

Still with me ?
This means that Gilts have become an excellent investment for life insurers.

The CSM for new business is going down (but still positive) but the charge for credit is now 0 so ROE increase significantly.

So far so good.
Read 7 tweets
Apr 8
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. Image
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. Image
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%. Image
Read 4 tweets
Mar 5
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
Read 12 tweets

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