ecb / economics question

Johoul · 01-03-2012 11:18am #1

Hi there - was just reading the latest update by Dan O'Brien on the IT website (http://www.irishtimes.com/newspaper/finance/2012/0301/1224312579469.html) and was wondering:

Is the cheap money currently being provided by the ECB allowing European banks to improve their capital ratios and avoid the need for sovereign recapitalization?

[Jackass] · 01-03-2012 3:17pm

Pretty much.

Stricter regulations are imposed just about everywhere with the amount of capital reserves that banks are required to have, and thus in order to get these ratios up they are receiving Government assistance, trying to offload bad debts and are loaning out little or no money.

The move to recapatalise banks in this manner is to essentially give them free money to lend out so that they can become profitable again whilst also pumping more money into the economy to increase job creation, productivity and growth...as the lack of growth is the main crippling factor in Europe right now.

I think we've mismanaged the banking crisis somewhat in this country by not giving more conditions on the bailout in terms of loaning money and also not phasing in the capital reserve requirement of banks more gradually, but we'll see what happens, but essentially yes, this is a stimulos package and not state guarenteed.

Johoul · 01-03-2012 3:41pm

Hmmm, not sure about all this stuff. Now wondering if the ECB action has done anything for the Irish taxpayer, since we jumped the gun and recapitalised ourselves before the big guys were helped out by the ECB.

AIB share price seems to have trebled in the past 6 months however BOI has been fairly flat. (AIB volumes were much smaller though). Still obviously prices very small compared to boom levels so effect is probably very small.

I wonder where share prices need to get to before the government starts to look like breaking even on our recap injection?

noodler · 02-03-2012 12:30pm

Johoul wrote: »

Hmmm, not sure about all this stuff. Now wondering if the ECB action has done anything for the Irish taxpayer, since we jumped the gun and recapitalised ourselves before the big guys were helped out by the ECB.

AIB share price seems to have trebled in the past 6 months however BOI has been fairly flat. (AIB volumes were much smaller though). Still obviously prices very small compared to boom levels so effect is probably very small.

I wonder where share prices need to get to before the government starts to look like breaking even on our recap injection?

I am 95% certain that a loan from a Central Bank can not be used for the purposes of recapitalisation.

The capital would have to be gotten by additional shareholder funds or, if this is not possible, the Government in question will have to borrow from the EFSF and then recapitalise the individual banks.

EDIT:

I can't find definitive proof for this but this article pretty much implies all the LTRO operations have done (which are just liquidity by the way) is improve market conditions for when banks try to raise the capital.

http://uk.reuters.com/article/2012/02/15/uk-eu-banks-idUKTRE81E13U20120215

SBWife · 02-03-2012 12:48pm

There is a difference between permanent capital and the liquidity provided by the ECB.

noodler · 02-03-2012 12:53pm

SBWife wrote: »

There is a difference between permanent capital and the liquidity provided by the ECB.

Indeed.

Think of it this way OP, how does a bank encumbering itself with billions of additional loans put it in a stronger position to withstand losses in the future?

Examples of Capital are:

- Shareholders funds (these don't necessarily have to be paid back)
- Hybrid Instruments (the defintions here can be complicated AFAIK)
- I also believe subordinated debt can be included as a lower form of capital since it doesn't have to be paid back in certain circumstances.

Johoul · 03-03-2012 11:57am

Thanks everyone. I did suspect that the ECB loans could not be included in the bank's total (though the Hybrid Instruments mentioned by noodler sound interesting!).

However, I guess there must be a strong indirect effect in that the availability of the ECB loan facility gives confidence to investors in the European banking system and allows those banks to raise capital more easily.

Any comments on this and European bank recapitalisation / firewalling against Greek default would be very interesting to me.

happyman81 · 08-03-2012 6:41pm

ECB funding is for liquidity, i.e. providing for the demand for cash of their depositors. The reason they need to borrow this is because they lent these depositors money to people who are now slow to pay it back, thus it is an issue of timing.

For example, if the bank had one borrower and one depositor of €100. The bank lends the €100 to the borrower for one year at 5% and the deposit is fixed for this term at 4%. All going well, the borrower will pay back, the depositor gets €104 and the bank makes €1. However, if the borrower falls into arrears (not written off, but cannot pay right now) at the end of that year then the bank will not have the money to pay the depositor. It's not that the money is gone, it's just trapped in a time warp. This is a liquidity issue (if the borrower legged it, then it would be insolvency, as the bank can never pay the depositor back), and is one of the main roles for central banks. The ECB lend this money because they can be pretty confident that it will be paid back, as it is not for healing insolvency, but rather it is being used to get the bank out of the time warp.

For the ECB to lend money for capital ratios, they would technically become shareholders in the bank, as they are providing equity (bank assets minus debt). This would obviously be a massive risk for the ECB, and why they are unlikely to take such a step.

More on capital ratios here:

http://en.wikipedia.org/wiki/Capital_adequacy_ratio#Risk_weighting_example

bushi · 14-03-2012 5:24pm

happyman81 wrote: »

For example, if the bank had one borrower and one depositor of €100.(...)

...only, if the bank had one depositor for €100, thanks to the fractional reserve banking miracle, they would then lend about €1000 (that's a hundred with one more zero at the end). So they will be collecting interest on €900 that never existed, also, they will be creating €900 that never existed, into existence, out of nothing, increasing the money supply in the economy by the flick of a mouse (bubbles, bubbles, anyone?).

And besides, they do not need any depositors anymore, they are getting all that they need from Central Banks (that is why depositors are getting ripped off with all the additional costs of banking - fees, fees, and then some more fees, and near-zero interest rates on savings - that doesn't look like "customer first" approach to me). Customers should run away from the banks far away and quickly.

jackass wrote:

The move to recapatalise banks in this manner is to essentially give them free money to lend out so that they can become profitable again whilst also pumping more money into the economy to increase job creation, productivity and growth...as the lack of growth is the main crippling factor in Europe right now.

...so unfortunate, that all that money isn't going anywhere near the productive economy, but rather stays in the "monopoly money" realms of hedge funds, investment banks, or indeed, gets deposited right back into the ECB overnight...

Banking system is hijacked and completely detached from the reality at the moment. It needs a solid shock therapy, and a reset down the road, which by the way, it will inevitably receive - the later, the more violent, and more destructive effect it is going to have on average person's life.

Iceland did the right thing. Iceland has already recovered, with much less suffer to Icelandic people, much less unemployment - and without receiving a SINGLE PENNY of bailout from the international banksters (actually, a lot of Iceland's assets was seized by UK banksters, using laws that were put in place to prevent terrorists funding. Indeed, Iceland is a known center of global terrorist activity!). The currency has collapsed - so what, if it had much less impact on average family, than our "technically and scholastically correct" things, like all the austerity measures, Quantitive Easings, LTROs, bailouts at nausea, and all that nonsense. Even the unemployment wasn't as bad over there, and certainly is not as big there now, than "good boy Ireland", receiving billions of bailout (and promptly pumping them into broken banks, where they disappear as in a black hole, to never emerge back and do something productive). Iceland had recently twice as many offers on their govt bonds public offer, than they wanted to borrow. Unlike all the European "bailed-out" economies, that private investors don't want to touch even with the barge pole.

happyman81 · 14-03-2012 5:27pm

bushi wrote: »

happyman81 wrote: »

For example, if the bank had one borrower and one depositor of €100.(...)

...only, if the bank had one depositor for €100, thanks to the fractional reserve banking miracle, they would then lend about €1000 (that's a hundred with one more zero at the end). So they will be collecting interest on €900 that never existed, also, they will be creating €900 that never existed, into existence, out of nothing, increasing the money supply in the economy by the flick of a mouse.

And besides, they do not need any depositors anymore, they are getting all that they need from Central Banks (that is why depositors are getting ripped off with all the additional costs of banking - fees, fees, and then some more fees, and near-zero interest rates on savings - that doesn't look like "customer first" approach to me). Customers should run away from the banks far away and quickly.

jackass wrote:

The move to recapatalise banks in this manner is to essentially give them free money to lend out so that they can become profitable again whilst also pumping more money into the economy to increase job creation, productivity and growth...as the lack of growth is the main crippling factor in Europe right now.

...so unfortunate, that all that money isn't going anywhere near the productive economy, but rather stays in the "monopoly money" realms of hedge funds, investment banks, or indeed, gets deposited right back into the ECB overnight...

Banking system is hijacked and completely detached from the reality at the moment. It needs a solid shock therapy, and a reset down the road, which by the way, it will inevitably receive - the later, the more violent, and more destructive effect it is going to have on average person's life.

Iceland did the right thing. Iceland has already recovered, with much less suffer to Icelandic people, much less unemployment - and without receiving a SINGLE PENNY of bailout from the international banksters (actually, a lot of Iceland's assets was seized by UK banksters, using laws that were put in place to prevent terrorists funding. Indeed, Iceland is a known center of global terrorist activity!). The currency has collapsed - so what, if it had much less impact on average family, than our "technically and scholastically correct" things, like all the austerity measures, Quantitive Easings, LTROs, bailouts at nausea, and all that nonsense. Even the unemployment wasn't as bad over there, and certainly is not as big there now, than "good boy Ireland", receiving billions of bailout (and promptly pumping them into broken banks, where they disappear as in a black hole, to never emerge back and do something productive). Iceland had recently twice as many offers on their govt bonds public offer, than they wanted to borrow. Unlike all the European "bailed-out" economies, that private investors don't want to touch even with the barge pole.

Christ, it was a simplifed example. I'm surprised I even had to point that out to someone, perhaps I have too much faith in the general population...

bushi · 14-03-2012 6:54pm

... That's because it is quite simple, in fact, when you step back from all the technical slang, that is only needed to try to explain "why the economy is NOT behaving the way that Keynesian scholars would like to have it", and what happens, when you analyse the models without considering the effects of ever-increasing burden of the debts, as they do.

Besides, simplified in what? Did they emerge yet from the collapse that the banks have brought onto their economy, or not (despite being in a much worse shape that Ireland was, initially)? Did they receive any external help, to pull that feat? Were their assets seized by UK, wherever they had a chance, or were they not?

happyman81 · 14-03-2012 6:58pm

bushi wrote: »

... That's because it is quite simple, in fact, when you step back from all the technical slang, that is only needed to try to explain "why the economy is NOT behaving the way that Keynesian scholars would like to have it", and what happens, when you analyse the models without considering the effects of ever-increasing burden of the debts, as they do.

Besides, simplified in what? Did they emerge yet from the collapse that the banks have brought onto their economy, or not (despite being in a much worse shape that Ireland was, initially)? Did they receive any external help, to pull that feat? Were their assets seized by UK, wherever they had a chance, or were they not?

This is just incoherent ramblings. Technical slang for a person who has no real knowledge. I really don't want to discuss anything with you.

Johoul · 14-03-2012 7:23pm

I think the Iceland case is worth some more discussion. As I recall, a large amount of Icelanders took out mortgages in foreign currencies. Any idea how these folks are getting on since the devaluation?

bushi · 14-03-2012 7:57pm

happyman81 wrote: »

This is just incoherent ramblings. Technical slang for a person who has no real knowledge. I really don't want to discuss anything with you.

Well thank you for your opinion, however rude and ad personam it was. That is really an unbeatable strategy for discussion, to declare your adversary an ignorant, and refuse to discuss.

Unfortunately, sitting on a high horse is not equal to winning on arguments. Equally unfortunate is, that people with exact same attitude to but one of the economic schools out there (however vastly prevalent, but demonstrably unable to foresight let alone prevent or tame increasingly violent economic cycles, and continuing destruction of the middle class' wealth), and treating it as a dogma that is above any rational doubt, (and if anyone dares to have a negative opinion on it, that person is automatically categorised as "ignorant", an "extremist", or whatnot) are taking us all for a ride. And for a very painful awakening, when all this house of cards finally collapses.

Johoul I don't have exact numbers to quote for you ATM, but quoting from my memory, there was also huge debt forgiveness going on in Iceland, AFAIR in the 12% of GDP ballpark.

There is a nice summary and comparison of the two roads, taken by Ice/Ireland, have read that a while ago and googled it back. Hope it is more "coherent", than my "ramblings" (LOL). Not very recent though (Dec 2010), and since then, the situation in Iceland improved much more:

http://www.telegraph.co.uk/finance/financialcrisis/8187476/Iceland-offers-risky-temptation-for-Ireland-as-recession-ends.html

Iceland has finally emerged from deep recession after allowing its currency to plunge and washing its hands of private bank debt, prompting an intense the debate over whether Ireland might suffer less damage if adopted the same strategy.

The Nordic economy grew at 1.2pc in the third quarter and looks poised to rebound next year. It ends a gruelling slump caused largely by the "New Viking" antics of Landsbanki, Glitnir and Kaupthing, the trio of lenders that brought down Iceland's financial system in September 2008.

The economies of the two "over-banked" countries have both contracted by around 11pc of GDP, but Iceland has achieved it with inflation that devalues debt, while Ireland has done it under an EMU deflation regime that raises the burden of debt.

This has led to vastly different debt dynamics as they enter Year III of the drama. Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year.

The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc.

The International Monetary Fund said Iceland has turned the corner, praising Reykjavik for safeguarding its "valued Nordic social welfare model".

"In the event, the recession has proved shallower than expected, and Iceland’s growth decline of about minus 7pc in 2009 compares favorably against other countries hard hit by the crisis," said Mark Flanigan, the IMF's mission chief for the country.

Total debt will peak at 115pc, before dropping to 80pc by 2015 in what the IMF called "robust debt dynamics". Meanwhile. Ireland's debt will continue rising for another three years to 120pc of GDP. The contrast will be very stark by the middle of the decade. Iceland may have a lower sovereign debt than Germany by then.

Iceland's president, Olafur Grimsson, irritated EU officials last month when he said his country was recovering faster because it had refused to bail out creditors – mostly foreigners.

"The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn't pump money into them in order to keep them going; the state should not shoulder the responsibility," he said.

The comments came just as the EU authorities were ruling out investor "haircuts" in Ireland, making this a condition for the country's €85bn (£72bn) loan package.

andrew · 15-03-2012 6:34pm

Keep it civil and on topic* lads/ladies.

*ie. don't mention fractional reserve banking, money creation etc. unless the discussion explicitly warrents it.

Not staying on topic will lead to infractions. If you've any questions about this, PM me so as not to disrupt the thread

bushi · 16-03-2012 10:51am

happyman81, can you be bothered to comment on The Telegraph article, that I've partially quoted above, and their comparison of these two roads taken?

You called me some names, fine, but can you add something else to this discussion?

happyman81 · 16-03-2012 10:56am

bushi wrote: »

happyman81, can you be bothered to comment on The Telegraph article, that I've partially quoted above, and their comparison of these two roads taken?

You called me some names, fine, but can you add something else to this discussion?

I'm afraid I can't, since you have now resorted to lying, as I didn't call you a name once. I feel now I have to just leave the thread, as you don't seem capable of representing other people's points of view in a fair and accurate manner.

andrew · 16-03-2012 12:05pm

bushi wrote: »

happyman81, can you be bothered to comment on The Telegraph article, that I've partially quoted above, and their comparison of these two roads taken?

You called me some names, fine, but can you add something else to this discussion?

Being antagonistic is bad. Don't post again in this thread.

bnt · 17-03-2012 9:42pm

Here's a short speech about banking from a 1932 Frank Capra film called American Madness. It could easily be remade today as European Madness:

https://www.youtube.com/watch?v=UP0MSt5g5WQ

ecb / economics question

Comments