Category Archives: banking

Oops, this Wasn’t Supposed to Occur in a Rosy Credit Scenario, by Wolf Richter

Generally credit expands in a healthy economy. Credit is contracting now. From Wolf Richter at wolfstreet.com:

It’s always associated with a recession: last time, the Financial Crisis.

Over the past five decades, each time commercial and industrial loan balances at US banks shrank or stalled as companies cut back or as banks tightened their lending standards in reaction to the economy they found themselves in, a recession was either already in progress or would start soon. There has been no exception since the 1960s. Last time this happened was during the Financial Crisis.

Now it’s happening again – with a 1990/91 recession twist.

Commercial and industrial loans outstanding fell to $2.095 trillion on May 10, according to the Fed’s Board of Governors weekly report on Friday. That’s down 4.5% from the peak on November 16, 2016. It’s below the level of outstanding C&I loans on October 19. And it marks the 30th week in a row of no growth in C&I loans.

Based on the Fed’s monthly reports, C&I loans outstanding at the end of April, at $2.095 trillion, were down a smidgen from October’s $2.098 trillion and were down 4.3% from the peak in November. This marks the seventh month in a row of no growth in loans.

This chart shows C&I loans outstanding at all US banks going back to 2012. Note how that 30-week stagnation-period is unique in this time span:

Since the Financial Crisis, the mantra has been: credit growth no matter what. Businesses have been exhorted to borrow, money has been cheap, and borrow they did. There have been periods of four or five weeks of stalling C&I loan growth, only to be succeeded by a vigorous surge. But after ballooning in this manner for six years straight, C&I loans have now languished for 30 weeks. And it’s not the oil bust; banks are lending to the oil patch again.

To continue reading: Oops, this Wasn’t Supposed to Occur in a Rosy Credit Scenario

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Chinese Insurer Warns Of “Mass Defaults, Social Unrest” Due To “Mass Redemption” Run, by Tyler Durden

While southern European banks remain the odds on favorite to kick of the next global financial crisis, you can’t rule out the Chinese shadow banking system. Like the southern European banks and just about everyone else, it has too much debt. From Tyler Durden at zerohedge.com:

One month ago, China came “this close” to the one event which terrifies Beijing more than anything: a run on China’s shadow banks.

As a quick reminder, 150 customers of China’s Mingsheng Bank, the country’s largest private bank, were furious in mid-April when they learned that some 3 trillion yuan invested in Wealth Management Products, the backbone of China’s shadow banking system, had vaporized after bank employees had engaged in fraud and embezzled the funds without ever investing it (later it emerged that Mingsheng employees had put the money into “cultural relics” and jewelry, for their own use).

And while fraud and embezzlement are both endemic in China, the bigger concern raised by the article was the threat of a bank run across China’s massive and unregulated, nearly $10 trillion shadow banking system. Indeed, while there have been numerous allegations and warnings that China’s entire shadow banking facade, dominated by WMPs and other “investment products”, is nothing but a giant ponzi scheme in which  recoveries – should there be a bank run, a topic recently discussed on Bloomberg – would be non-existent if there is ever a bank run, defaults of WMPs issued by big banks – and this case an unapproved WMP – are rare, as are shadow bank runs.

For now.

However, in a stunning announcement made by one of China’s largest insurers, Foresea Life has warned of “mass defaults and social unrest” unless China’s regulator lifts a recent ban on its issuance of new products. In a letter to China’s insurance regulator, first reported by the Financial Times, Foresea Life Insurance which is a heavy investor in WMPs, has warned  that the company expects “redemptions” of 60 billion yuan, or $8.7 billion, this year and might be unable to meet payouts unless it is able to sell new products.

To continue reading: Chinese Insurer Warns Of “Mass Defaults, Social Unrest” Due To “Mass Redemption” Run

ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency, by Don Quijones

An Italian banking system collapse still in one of the favorites for the catalyst that kicks of the next global debt crisis. From Don Quijones at wolfstreet.com:

The only other option: “Orderly restructuring.”

Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.

But now there’s a snag.

Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At €4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP. The ECB has already reduced the rate of purchases to €60 billion a month. And it plans to further withdraw from the super-expansionary monetary policy. To do this, according to Der Spiegel, it wants to spread more optimistic messages about the economic situation and gradually reduce borrowing.

Frantically sowing the seeds of optimism on Wednesday was Bruegel’s Francesco Papadia, formerly director general for market operations at the ECB. “On the economic front, things are moving in the right direction,” he told Bloomberg. The ECB will begin sending clear messages in the Fall that it will soon begin tapering QE, Papadia forecast. By the halfway point of 2018 the ECB would have completed tapering and it would then use the second half of the year to move away from negative interest rates.

So far, most current ECB members have shown scant enthusiasm for withdrawing the punch bowl. The reason most frequently cited for not tapering more just yet is their lingering concern about the long-term sustainability of the Eurozone’s recent economic turnaround.

To continue reading: ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency

 

Financial Weapons Of Mass Destruction: The Top 25 U.S. Banks Have 222 Trillion Dollars Of Exposure To Derivatives, by Michael Snyder

It is, as SLL has pointed out, somewhat misleading to list a financial institution’s gross exposure to derivatives without netting out offsetting positions (a long and a short of the same instrument). However, if case of systemic failure, if counterparties are unable to meet their commitments, net exposures can quickly become gross exposures. So read about banks’ gross exposures with a grain of salt, but realize the numbers are not completely irrelevant, especially in a financial crisis. From Michael Snyder at theeconomicollapseblog.com:

The recklessness of the “too big to fail” banks almost doomed them the last time around, but apparently they still haven’t learned from their past mistakes.  Today, the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives.  In other words, the exposure that these banks have to derivatives contracts is approximately equivalent to the gross domestic product of the United States times twelve.  As long as stock prices continue to rise and the U.S. economy stays fairly stable, these extremely risky financial weapons of mass destruction will probably not take down our entire financial system.  But someday another major crisis will inevitably happen, and when that day arrives the devastation that these financial instruments will cause will be absolutely unprecedented.

During the great financial crisis of 2008, derivatives played a starring role, and U.S. taxpayers were forced to step in and bail out companies such as AIG that were on the verge of collapse because the risks that they took were just too great.

But now it is happening again, and nobody is really talking very much about it.  In a desperate search for higher profits, all of the “too big to fail” banks are gambling like crazy, and at some point a lot of these bets are going to go really bad.  The following numbers regarding exposure to derivatives contracts come directly from the OCC’s most recent quarterly report (see Table 2), and as you can see the level of recklessness that we are currently witnessing is more than just a little bit alarming…

Citigroup

Total Assets: $1,792,077,000,000 (slightly less than 1.8 trillion dollars)

Total Exposure To Derivatives: $47,092,584,000,000 (more than 47 trillion dollars)

JPMorgan Chase

Total Assets: $2,490,972,000,000 (just under 2.5 trillion dollars)

Total Exposure To Derivatives: $46,992,293,000,000 (nearly 47 trillion dollars)

Goldman Sachs

Total Assets: $860,185,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $41,227,878,000,000 (more than 41 trillion dollars)

Bank Of America

Total Assets: $2,189,266,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $33,132,582,000,000 (more than 33 trillion dollars)

Morgan Stanley

Total Assets: $814,949,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $28,569,553,000,000 (more than 28 trillion dollars)

Wells Fargo

Total Assets: $1,930,115,000,000 (more than 1.9 trillion dollars)

Total Exposure To Derivatives: $7,098,952,000,000 (more than 7 trillion dollars)

Collectively, the top 25 banks have a total of 222 trillion dollars of exposure to derivatives.

To continue reading: Financial Weapons Of Mass Destruction: The Top 25 U.S. Banks Have 222 Trillion Dollars Of Exposure To Derivatives

A Tale of Two Justice Systems – Wall Street vs. Main Street, by Michael Krieger

Hold up a liquor store; go to prison, probably for a long time. Hold up the US banking system; make gobs of money until the system blows up, then get bailed out by the government and go back to making gobs of money. It only seems unfair because it is. From Michael Krieger at libertyblitzkrieg.com:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

– Charles Dickens, A Tale of Two Cities

One of the major objectives of this site over the years has been to highlight the demoralizing and extremely destructive reality that two completely different justices systems exist in America — one for the wealthy, powerful and connected, and another for everyone else. While there will always be some element of this in any society of humans, extremes can and do occur, and the pendulum now has shifted in these United States to extremely dangerous Banana Republic-like levels.

Nowhere is this divergence of justice more in your face and deplorable than with respect to how Wall Street financiers are treated compared to the rest of us. Not only was the industry rewarded with endless financial lifelines and zero executive prosecutions after it destroyed the global economy, but the industry continues to do whatever it wants, whenever it wants, with zero repercussions. It doesn’t take genius to understand that if there’s no risk in committing financial crimes, you get a lot more of them.

Speaking of Wall Street being able to do whatever it wants, let’s take a look at what Goldman Sachs is up to courtesy of some excerpts from a recent article by David Dayen published at The Fiscal Times:

Goldman Sachs is on a shopping spree. Last week, it spent $500 million to buy 12 percent of Riverstone Holdings, a private equity firm focused on energy investments. This is part of a $2 billion private equity strategy for the vampire squid. Through a couple of subsidiary funds, Goldman has already acquired stakes in private equity players Littlejohn & Co. and ArcLight Capital Partners, and  Accel-KKR, a firm specializing in tech companies.

To continue reading: A Tale of Two Justice Systems – Wall Street vs. Main Street

In Bleak Prognosis, Italy’s Financial Regulator Threatens EU with Return to a “National Currency”, by Don Quijones

The Italian financial system just keeps getting worse. It will blow up. From Don Quijones at wolfstreet.com:

Nerves are fraying in the corridors of power of the Eurozone’s third largest economy, Italy. It’s in the grip of a full-blown banking meltdown that has the potential to rip asunder the tenuous threads keeping the European project together.

In his annual speech to the financial market, Giuseppe Vegas, the president of stock-market regulator CONSOB — a consummate insider — delivered a bleak prognosis. The ECB’s quantitative easing program has “reduced the pressure on countries, such as ours, which more than others needed to recover ground on competitiveness, stability and convergence.”

But it hasn’t worked, he said. Despite trillions of euros worth of QE, Italy has continued to suffer a 30% loss in competitiveness compared to Germany during the last two decades. And now Italy must begin to prepare itself for the biggest nightmare of all: the gradual tightening of the ECB’s monetary policy.

“Inflation is gradually returning to the area of the 2% target, while in the United States a monetary tightening is taking place,” Vegas said. The German government is exerting mounting pressure on the ECB to begin tapering QE before elections in September.

So, too, is the Netherlands whose parliament today treated ECB President Mario Draghi to a rare grilling. The MPs ended the session by presenting Draghi with a departing gift of a solar-powered tulip, to remind him of the country’s infamous mid-17th century asset price bubble and financial crisis.

For the moment Draghi and his ECB cohorts refuse to yield, but with the ECB’s balance sheet just hitting 38.7% of Eurozone GDP, 15 percentage points higher than the Fed’s, they may ultimately have little choice in the matter. As Vegas points out, for Italy (and countries like it), that will mean having to face a whole new situation, “in which it will no longer be possible to count on the external support of monetary leverage.”

To continue reading: In Bleak Prognosis, Italy’s Financial Regulator Threatens EU with Return to a “National Currency”