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)

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.

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

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

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.

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.

Weird stuff going on in Switzerland with the “Credit Suisse” ordinance that was adopted on Sunday evening, the day of the “bail-in” of AT1 bonds.

A thread, I believe interesting for the new AT1s UBS is issuing and for the former CS AT1 holders. As a quick reminder, after saying CS was solvent and liquid, the Swiss government adopted a nonpublic ordinance for emergency funding to CS on March 16th.

Then on March 19th they added an article saying they were allowed to wipe out AT1 holders.

A follow-up on this.

Many of us (including me, often) are stuck in the old pre-GFC mindset about UK mortgages.

So it’s time for a refresher to check what that market really looks like now.

https://twitter.com/jeuasommenulle/status/1673223116506497024

First: it’s big.

Mortgages are 88% of total UK household debt & UK household debt is 85% of GDP vs. e.g. 58% in Euro area!

The debt service is also big: the ratio is 8.5, vs e.g. 7.7 in the US, 6.5 in France or 5.7 in Spain.

A question I get a lot: what about TLTRO redemptions in June, will this trigger liquidity problems for some banks & Liquidity coverage ratios (LCR) falling sharply?

Lots of doom takes on this, so let’s look at the facts. First, the numbers.

TLTRO is now 1.1tn (down from 2.1tn), banks redeemed last year after the carry trade was (controversially) killed by the ECB.

Still big numbers in Italy (143bn), France, Germany.

Qui comments on yesterday's EC proposal to change the hierarchy of bank claims, which is best summarized in this chart.

I think it's a very bad proposal for 3 reasons. 1) It's crazy to change this every 5y. Investors needs stabillity
2) NPS was introduced because senior is pari passu to deposits. They're now making NPS useless. Thanks for the extra spread paid.
3) "Deposit" is just a legal structure. This is a recipe for masssive arbitrage

I don't know why Depp is in there but apart from him. Twitter trending for France is a good recap of everything that's burning, from PSG to Blackrock Except of course that psg is only metaphorically burning

Using a very common sense approach, where, for example, banks solve this optimization problem, the BIS estimates that 30% of GDP issued in CBDC will increase welfare by 2%.

I don't even know where to start. I'm sure you're anxious to know about money demand, so no need to freak out, I've got you covered.

Still trying 2 investigate what happened on Deutsche CDS Thur & Fri but meanwhile, it's useful to give a general view on CDS single name liquidity.

Deutsche is one of the most traded CDS in the world but according to the latest DTCC data avg volume is 5Om/day &... 9 trades! Comparing with equity - which is approx 17m shares a day - it's significantly less but not negligible

However the number trades is entirely different & that's why a couple of big trades can move markets much more.

Tbf there’s probably not much to add to this, but the people have spoken, so a thread on Deutsche Bank and the market action today that's been pretty wild

https://twitter.com/jeuasommenulle/status/1639280481597374466

Q1: why DB?

I can’t believe you people ask. It’s always DB.

Ofc DB lost its top #1 rank in the bank shitshow index to CS a while ago, but when troubles arrive, people have a memory & remember DB.

A big IB, litigation, low ROE for years, the playbook.

Why is UBS asking for a 6bn legal backstop , is it reasonable amt & can it stop the deal?

I *think* a) it's higher than the actual risk b) it's unlikely to stop a deal and c) CS could pay a price for that w/o reducing equity too much.

A thread.

JUST OPINION, I COULD BE WRONG CS has 1.17bn of litigation provisions, they took an additional net of 1.5bn in 2022, but also settled 2bn so this is actively managed.

Here's a list of the main matters left & you'll see why I think 6bn is reasonable (probably too high for just legal)

Let me answer this cos' it's important & I've heard many errors. So AFAIK (I'm not an accountant) here's what banks are allowed to do to hedge a bond book:

1. ofc your're legally allowed to hedge, question is whether the accounting treatment is ok or creates vol

https://twitter.com/LucioMM1/status/1636518277961637894

2. There's a big difference in US & Europe. Technically in US GAAP you can't fair value hedge a fixed-rate HTM bond (you can with a loan) so if you hedge you have P&L, Equity and CET1 volatility which banks want to avoid. There are tricks around this though.

Probably foolish of me to make forecasts about the future, but what do I think will happen with SVB next week? $SVIB #SVB

(I know this will horribly backfire but never mind) 1st, I truly think SVB had a horrible business model.

Volatile & correlated sight deposits & long-term fixed rate bonds with no hedge: truly a recipe for disaster.

Fed & FDIC will be keen to avoid moral hazard there. I don't see a bailout. This is not the 1990s anymore.

We’re all talking about gvt bonds, unrealized losses, bank runs, liquidity etc. so now is the time to reveal my most hilarious professional anecdote ever.

Context: Dexia was a large bank, short term funding (deposits + interbank) & long term assets (mostly govies-like risk). Rings a bell? The kind of biz where access to emergency backup (CB) funding is crucial.

The story now.

This is the peak of the GFC/EZ liquidity crisis. We’re a group of banks summoned by the central bank to discuss ways out the mess and avoid a meltdown.

Commercial real estate is the kingdom of bullshit & there are not that many specialized banks - so it’s useful to hear what they have to say (more useful than “conferences” 😊) if you want to split signal & noise.

Here’s the global big picture, from PBB.

@kittysquiddy @kittysquiddy Volumes: US going down sharply, but from absurd levels - so not sure it's a bad thing!

Europe more stable. Sentiment is very weak

It is this time of the year...

NEW ECB/EBA Stress Tests klaxon!

Scenario, list of banks, etc, all released today.

Like during Covid, the macro outlook is very uncertain but UNLIKE Covid, no public support will be considered. This make a big difference.

A few very hot takes. First, the scenario is severe. Really. More severe than all previous ECB/BOE/Fed tests (Covid quick and dirty analysis excluded).

The combined EZ GDP deviation is -9.6%, it was -7.9% in the 2020 ST that never happened.

I must confess this chart & numbers surprised me because it seemed wrong but also it was tweeted by reliable accounts afaik. So what’s going on? Are corporate treasurers in panic mode because of hikes? I did a deep dive & the outcome is fascinating but NOT what you would expect!

https://twitter.com/dlacalle_IA/status/1616541241478447136

1st, the data is not accurate, but no far off either.

Using Bloomberg database, excluding sovereign bonds I get 51.6% of bonds issued in December 2022 expiring in 2023.

That’s a lot indeed! And in 2021 the equivalent share was 8.5%. Clearly something is going on. What?