Thursday, November 22, 2007

Bank Capital "Tightening the safety belt" / Economist

Crunch, crunch......And they are still only talking about subpirme...... I assume lots of banks are already regretting their massive buybacks during the past years..... Just ask Fannie, Freddie, Countrywide etc...... But this is also true for almost every other company out there. Jeff Matthews has more on this topic Big Buybacks Begin to Haunt Firms SCHADENFREUDE!

Man kann den Credit Crunch deutlich hören....Und bisher wird immer nur das Thema Subprime angeführt...Ich bin mir sicher das etliche Bankvorstände Ihre Aktienrückkauforgien aus den letzten Jahren schon jetzt bereuen....... Fragt mal bei Fannie, Freddie, Countrywide usw nach......... Gleiches gilt aber inzwischen aber wohl für die meisten Firmen. Hier ein nettes Beispiel von Jeff Matthews Big Buybacks Begin to Haunt Firms

Bank Capital "Tightening the safety belt"
THE only thing bankers can have felt grateful for this Thanksgiving was a rest. Confidence in subprime-related mortgage products continues to fall. Rating agencies are slashing collateralised-debt obligations (CDOs) faster than you can slaughter turkeys. Analysts at Goldman Sachs reckon that, despite the large write-downs already announced by financial institutions, another $108 billion-worth of losses on subprime CDOs have yet to surface (see chart). Adding to the gloom, a $2 trillion source of mortgage funding in Europe, known as the covered-bond market, was temporarily suspended on November 21st because of sliding prices.

All this turmoil is focusing attention on banks' capital ratios, the amount of money they set aside as a percentage of assets to cover unexpected losses. This cushion is being squashed in a number of ways. First, net losses eat directly into capital. Second, since capital ratios are typically calculated on the basis of how risky a bank's balance sheet is, the ratings downgrades add to the amount of rainy-day money banks need to set aside. Third, assets are growing as banks take on the financing of more off-balance-sheet vehicles, which again adds to the capital they need.

At some banks, capital ratios are dropping fast. UBS, a Swiss bank, has seen its tier-one ratio (which divides a bank's risk-weighted assets by its core capital) fall from 12.3% at the end of the second quarter to 10.6%. At Citigroup the tier-one capital dropped to 7.3% in the third quarter, down from 7.9% in the previous one. It remains comfortably above the 6% threshold that American regulators use to define institutions as well capitalised. But as expectations of further write-downs grow, it and others with deteriorating capital ratios will be under pressure to reverse the trend.

There are a number of ways for banks to improve things. They can suspend share buybacks. Or sell non-core assets: Merrill Lynch's stake in Bloomberg, a financial-information provider, looks eminently disposable. They can cut dividends: expectations are growing that Citigroup will do so. In more extreme cases, they could issue new shares: the bond insurers, which depend on impeccable credit ratings and are important for the health of the banking system, may have no choice but to raise capital. One, French-owned CIFG, has been promised $1.5 billion.

Rights issues and punier dividends would be bad news for shareholders. But the really pernicious effect of capital weakness comes when banks rein in their lending and investment activity in order to keep their capital ratios constant. Back-of-the-envelope calculations from Goldman Sachs suggest that if banks suffer a $200 billion loss on subprime mortgages but want to keep their capital ratios at an average level of 10%, that would stifle lending by a whopping $2 trillion.

Regulators may tighten the screw as well. Confidence in the tier-one capital ratio favoured by European regulators seems to have evaporated, says Simon Samuels, an analyst at Citigroup. Investors seem to pay closer attention to more cautious capital measures such as the leverage ratio, which does not allow for any risk-weighted adjustment to assets.

Some regulators may be tempted to take a more conservative approach, perhaps by imposing additional charges on individual banks. They should be wary: banks may need to swerve to avoid a capital crisis; but slamming on the brakes entails dangers of its own.
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Anonymous Anonymous said...

Weber comments today about "ecb ongoing liquidity provisions"

Do we have any specific details as to what is being done here?

For example if the mortgage market *is* essentially functioning and yet the credit market is seized up then presumably the ECB is involved here providing liquidity for mortgages?


6:54 AM  
Blogger jmf said...


the only thing i know is that every time one of these stupid central bankers & politicians opens their mouth the case for gold is getting stronger stronger.... :-)

I really wish we had the good old Bundesbank with a strict M3 target back in charge.

Lot´s of pain wouldn´t have happened....

8:09 AM  
Anonymous Anonymous said...

heisst das, dass auch BB keine M3 mehr publiziert? Wikipedia sagt nichts darueber...meinst Du, mit alter BB, BB vor der Reform 2002?
Fed publiziert nicht mehr seit 4/06 'weil es zuviel kostet'.

Darf ich Anonymous bleiben?

9:34 AM  
Blogger jmf said...


in der Tat meine ich die "eigenständige" BB zu D-Mark Zeiten

Die EZB ist leider nur ne schlechte Karrikatur....

10:53 AM  
Anonymous Anonymous said...

I am wondering too to what extent there is a subprime and reset problem in europe?

Has there been any discussion on this anywhere with some details?

I saw yesterday there are subprime lenders in the UK and they have very recently gone from a 95% LTV to a much more conservative LTV thus excluding this group of people from refinance or moving unless they have large equity.

And what about ARMs and so forth?

Is this a european issue? Do we have any of those fancy reset graphs available by country and so forth?


11:43 PM  
Blogger jmf said...


i havn´t seen any reset cahrt but here is the percentage of mortgages with varibales rates. Pretty scary.

And this is from the Pimco link for UK...

The next twelve months will probably see most of these fixed-rate deals mature and interest rates for a majority of households rise. CML data already shows that 2-year, 75% Loan-to-Value (LTV) mortgage rates averaged 4.67% in July 2005 compared to 6.1% in July 2007.

But the bottom line is that come October, 2-year fixed-rate deals could be some 175bp higher than they were two years ago;


1:10 AM  

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