These are important.

Despite some variation, average ratio of high risk assets to equity was 188% across these major banks:


Many thanks to Russ Winter for chart and graphic!

euroarealendingsurvey0408  ←link to full report

The Euro Area lending survey for April 2008 is out, and shows considerable tightening in both lending standards and in loan demand across consumer, enterprise and mortgage credits. 

This in Wednesday, via a Reuters conference in London: Hugh Hendry, CIO of hedge fund Eclectica Asset Management, declared that financial stocks could take 25 years to recover from the subprime disaster and added that Citigroup Inc. would fall below $10 a share. (more…)

According to reporting by Bloomberg, lenders are trending towards looking the other way when homeowners become deliquent on mortgage payment due to a glut of pending foreclosures.  Click through for the article →

http://www.bloomberg.com/apps/news?pid=20601109&sid=aefAJU_88vfs&refer=home

This is not advice to stop paying mortgage payments.  Obviously, lenders act in their own self-interest, so this is probably a business decision based on the volume of deliquencies and foreclosures.  It would seem that sitting on a delinquency would just postpone the pain and make it worse by adding penalties, interest, late fees, etc.

Der Spiegel reports that Germany is facing its worst banking crisis since 1931, with the government fearing the domino effects of allowing the insolvent banks to fail.  For now, capital infusions keep coming and instantly vanishing into thin air.  Included in the report is a very interesting story on WestLB, a bank that was insolvent and which was initially turned away at the door when it went begging for capital to stay afloat.  This shows how ugly can get:  “ In a crisis meeting two weeks ago, the two savings and loan associations in North Rhine-Westphalia that own half of WestLB had to admit that they were unable to come up with €1 billion in fresh capital for the ailing bank. They insisted that it was up to the state to cover another €3 billion in risks. (more…)

Turmoil in the financial markets has resulted in more attention being given to the banking system.  Many are familiar with the FRB data recently showing bank’s non-borrowed reserves dropping. 

So, what about the reserve requirements for banks?  A layperson would think that a bank has to keep a percentage of its total deposits as actual cash, actually available on demand.  But these days it seems that’s an old-fashioned passe attitude.  In actuality, banks are able to avoid the reserve requirements to an amazing extent.  That way they can devote much more of your deposit accounts to suprime lending! 

Curious exactly how its done? The FDIC (which is funded by the banks) published a study explaining it.  Among other techniques, banks are using ”sweeping” rules to decrease the amount of cash reserves they must actually hold.  One bank “successfully” used sweeps to “reduce its required reserves from $788,000 in August 2000 to $48,000 in August 2001, a period when deposits at the institution rose by $36 million.”

“An additional impetus to establishing sweep accounts is the dollar amount required to meet a bank’s reserve requirements.  All depository institutions must reserve an amount equal to between 3 percent and 10 percent of the funds they have in interest-bearing and noninterest-bearing checking accounts.  The total required to be held in reserve is determined relative to the total deposits held in the qualifying accounts at each bank.  Once the amount of the reserve is determined, banks may choose to hold their reserves in the form of cash (vault cash) or in an account at a Federal Reserve Bank (FRB) (sterile reserves), but in either case the funds are nonincome producing.  As a result, a key strategy of bank liability management has been to discover ways of building a bank’s deposit base while keeping required reserves to a minimum.”

In the context of an ordinary checking or savings account (”retail demand deposit account”), the study explains the reserve requirement on these monies can actually be zero, and explains exactly how it works:

“. . . when newly designed computer software enabled a bank to analyze its depositors’ use of their transaction accounts, sweeps became one of the main tools used to minimize a bank’s required reserves: any funds deemed by the bank to be excess were automatically transferred into MMDAs.  (As a result of these transfers, a bank’s required reserve ratio could go from 10 percent to zero).  And in 1994, when the Federal Reserve Board authorized banks to use this software to reclassify any transaction-account, retail sweep programs developed as banks notified their customers when they opened an account that “your deposit may be reclassified for purposes of compliance with Federal Reserve Regulation D. . . .”  Banks began initiating sweeps without the customers’ explicit approval, and the volume of transfers occurring between transaction accounts and MMDAs increased dramatically.

The MMDA used in a retail sweep program operates as a “shadow” account that is visible only to the depository institution.  The bank reduces its required reserves while leaving unchanged the transaction deposits that are available to the depositor.  A bank’s level of transaction accounts decreases sharply, whereas the depositor’s view of the account appears unaffected.  Just as this transfer occurs without the depositor’s explicit approval or knowledge, so, too, any profits that the bank earns are not generally shared; in addition, banks also can choose how the funds will be invested.”

 Bottom line:  the bank may be operating a shadow account under your checking account, sweeping the money out, using it, and keeping the profits - and you’ll never know.  Read the study here → fdicbankliability.pdf

You scratch my back; I’ll scratch yours.  The Securities & Exchange Commission has announced it is changing the rules for the banks’ reporting of bad/questionable debt instruments.  As Bloomberg reports, this amounts to letting banks out of certain arcane accounting rules with the result that they do not have to reflect the full extent of the damaged credit on their balance sheets:  http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aPSScH5rRBLM  (more…)

Today IMF released its latest report on global financial markets (well worth a read - see link).  Financial markets have worsened as evidenced by pressure on bank balance sheets, and problems will broaden as credit deterioration widens.  IMF recommends transnational stabilization efforts.  Direct link to report:

    imf01292008.pdf

Satyajit Das opines that the tools available to central banks are inadequate to address the scope of the global economic problems we face.  The black box or shadow economy may involve the unwinding of “innovative” financial products/derivatives such that monetary and fiscal policy simply will not work this time. 

http://www.boston.com/bostonglobe/ideas/articles/2008/01/27/the_black_box_economy/

Clayton Holdings, the largest provider of due diligence review of mortgages for the major mortgage bankers, has been given immunity by NY Attorney General Cuomo.  It appears from this news that the mortgage bankers wanted the due diligence reviews to find fewer “lending exceptions” in the subprime loans than actually existed.  It is suggested that the actual figure is 50%-80% of the loans had lending exceptions.  The due diligence reviews may have been limited to small numbers of loans within the portfolios, so that when the loans were bundled and securitized they would appear to be higher quality credits than they actually were. 

This is interesting for a number of reasons, including the question of the rating agencies’ culpability and the monolines’ liability.  Read the NY Times  story here: (more…)

Way back when he was “just” a Fed Governor, in 2002, Bernanke gave an amazing speech detailing what he would do to prevent or cure deflation.  I read him as saying that he doesn’t think the U.S. will go into deflation because our financial system (banks and household balance sheets) are so healthy (forget that now!).  The other reason he gives is that the Federal Reserve can itself prevent or cure deflation.  Bernanke gives a list of the steps he would take — and it looks as if he’s already several steps down on the list with the TAF auctions.  But never fear, as a bottom line Bernanke thinks we should all be comforted by the fact that if all else fails, he’s got a printing press (oops, a copy machine) to print lots of dollar bills and reinflate the economy. 

It’s true, and worth another close read: 

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/#f8

* Chinese bank earnings will suffer because of subprime crisis and tighter monetary policy and macro-economic controls

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