The banks are in trouble yet again

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by Shaun Richards

This week has opened with what has become a familiar drum beat and bass line. The banks are in trouble again. Or rather what has now been over a decade of trouble has just got worse.

HONG KONG (Reuters) – HSBC HSBA.L and Standard Chartered STAN.L Hong Kong shares dropped on Monday after media reports that they and other banks moved large sums of allegedly illicit funds over nearly two decades despite red flags about the origins of the money.

So this started before the wave of post credit crunch bank bailouts although those two banks were only implicitly rather then explicitly supported. The driver here is explained by Reuters below.

BuzzFeed and other media articles were based on leaked suspicious activity reports (SARs) filed by banks and other financial firms with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCen).

The revelations underscore challenges for regulatory and financial institutions trying to stop the flow of dirty money despite billions of dollars of investments and penalties imposed on banks in the past decade.

There are all sorts of issues here as we note that the supposedly reformed system has failed again.The reason for the article relating to Hong Kong is that is where the financial week has mainly started with Japan being closed for Respect the Elders day.

The share price impact is as follows.

HSBC shares in Hong Kong fell as much as 4.4% to HK$29.60 on Monday, their lowest level since May 1995. The stock has now nearly halved since the start of the year.

StanChart dropped as much as 3.8% to HK$35.80, the lowest since May 25 this year. The Hang Seng Index .HSI was down nearly 1%.

The two banks noted here have followed a typical path for banks as it was only a few short years ago that there emphasis on China and the Far East was presented as a triumph. Now HSBC has a share price at its lowest for 25 years.

Who are the main players?

According to the ICJJ report it is again a familiar list.

The records show that five global banks — JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon — kept profiting from powerful and dangerous players even after U.S. authorities fined these financial institutions for earlier failures to stem flows of dirty money.

Of these one is picked out.

JPMorgan, the largest bank based in the United States, moved money for people and companies tied to the massive looting of public funds in Malaysia, Venezuela and Ukraine, the leaked documents reveal.

However in terms of scale we have a case of hello darkness my old friend.

In all, an ICIJ analysis found, the documents identify more than $2 trillion in transactions between 1999 and 2017 that were flagged by financial institutions’ internal compliance officers as possible money laundering or other criminal activity — including $514 billion at JPMorgan and $1.3 trillion at Deutsche Bank.

Market Impact

You may not be surprised to learn that my old employer DB is down 6% this morning at 7.19 Euros. This compares to over 16 Euros at various points in the “Euro Boom” of 2017. It also rallied to above 9 Euros in early June presumably buoyed by the subsidy provided by the even better than free money provided by the ECB, For newer readers banks can go to it and borrow money at -1%. This is presently the lowest official interest-rate in the world.

If we switch to the Italian banks there are not many to look at as the falls have been so large that prices now mean little. If we go back to 2015 there were more than a few presenting Unicredit as a triumph of what was then being called Renzinomics. Anyway like so often happens with an Italian bank the around 30 Euros of late 2015 has been replaced by 7.23 Euros now sown 4% or so today.

If we switch to my home country the UK I noted this from @RonnieChopra1

UK economic bellwether, Lloyds Bank shares at 24p – lowest level since 2009.

I am not so sure they are a bell weather anymore but none the less. Barclays are down 6% at 91.5 pence as is Nat West.So the pain is widespread.

Bank of England

The official view is below.

Banks’ capital and liquidity positions have remained resilient through the shock so far.

It is based on this.

The global banking system entered into this shock in a much stronger position than the global financial crisis. Major UK banks and building societies (‘banks’), in aggregate had over three times their pre-crisis common equity Tier 1 (CET1) capital ratios at end-2019.

That is good except as we have been noting from the share prices it is not enough and the ever lower share prices limit the ability of the banks to raise new equity capital. Or of you prefer it becomes ever more expensive for existing shareholders in terms of dilution or weakening of their position.

Also whoever was responsible for this last week is probably hiding down in the darkest recesses of the Bank of England cellar where even the tea trolley fears to go.

Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative
Bank Rate could be implemented effectively,

As it put the UK banks on the back foot before the weekend just in time for the ICIJ news to break.

Neel Kashkari

The President of the Minneapolis Federal Reserve made an interesting speech on this subject last week. He thinks they need more capital.

This analysis shows clearly that large banks should fund themselves with equity of at least 24 percent of risk-weighted assets—up from around 13 percent today. That would maximize the benefit to society and protect taxpayers because, at those levels, banks could cover their own losses.

Also he points out that the US banking sector has grown.

 But the 10 largest bank holding companies in America are around 45 percent larger than they were going into 2008, having grown from roughly $9 trillion to nearly $13 trillion in assets.2

But there has been something very worrying going on.

 In fact, combined, the eight largest global banks headquartered in the United States bought back more than $110 billion of stock in 2019 alone.

ECB

It is hinting at this today.

They said important questions for the review would be to consider how long the Pandemic Emergency Purchase Programme should continue and whether some of its extra flexibility should be transferred to the ECB’s longer running asset-purchase schemes.

More support for the banks?

Comment

If we step back and consider the situation we are facing what looks ever more a fatal mistake bu the establishment. What was supposed to rescue the banks has ended up crippling their ability to make any money. As @Goldmarketgirl put it earlier.

Banks are screaming they need higher rates on longer term loans. Their business models are based on difference between long and short term debt.

For a while this was hidden by the capital gains on their bond portfolio’s especially in Italy where the banks hold a lot of sovereign. The issue that they could never get out in that size has been ended by the purchases of the ECB. But these are one-off and once you have taken them you are back with a struggling business model. That is why the share prices are so poor.

We were promised that in return for the bailouts and all the various subsidies the banks would recover and support the economy. Does anybody still believe that?

As to money laundering this is an ongoing issue that never goes away. There was a large swerve here though because the authorities put the burden of proof on the banks partly because it shifted it from them and partly because bodies such as the Serious Fraud Office are so useless. Perhaps they need the sort of emergency pack suggested by my local council over the weekend.

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