Commentaries

Now raising intellectual capital

Do banks really need to hoard liquidity?

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That’s the provocative question posed by Willem Buiter. His latest, characteristically lengthy, blog post tackles the regulatory vogue for forcing banks to hold much greater reserves of liquid assets – in practice, government bonds.

Buiter’s missive follows new rules from Britain’s Financial Services Authority, which will force banks to increase their reserves of government bonds by more than a third. The rules have been met with predictable bleating from the industry, which accuses the regulator of undermining Britain’s competitiveness and promoting the fragmentation of the global financial system. Another concern is the FSA’s handling of the transition.

Buiter’s objections are more fundamental. He’s not convinced banks should be preparing to deal with a seizure in the markets. That, he argues, is the job of central banks:

It may be possible for private banks to hold enough liquid assets (government debt, effectively) on their balance sheets to survive even a major liquidity crunch without recourse to the central bank.  But that would be socially inefficient.  Banks are meant to intermediate short liabilities into long-term assets, and frequently into long-term illiquid assets.  It’s what their raison d’être is.

Granite crumbles

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Standard & Poor’s dropped a minor bombshell last night when it placed over 100 bonds issued by Northern Rock’s mortgage funding vehicle Granite on creditwatch negative.

Of course the rating actions are lagging the market and a lot of pain is already priced into the bonds. Some of Granite’s mezzanine BBB bonds are trading below 20 pence on the pound.

Don’t underestimate the European Commission

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Will RBS and Lloyds have to follow Northern Rock and defer coupons on their hybrid debt? There’s a nagging fear that any bank that has needed large amounts of state-aid may have to make subordinated bondholders take some of the pain.

Fitch Ratings has just added to the debate with a slew of downgrades of RBS, Lloyds, and six other banks’ subordinated debt, citing an “increased risk of deferral.” The chief threat here is the European Commission, which is getting very keen on the concept of “burden-sharing”, a euphemism for crucifying bondholders.

Are Lloyds shares cheap? Not as cheap as this funny money

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Shares in Lloyds Banking Group are worth 150 pence apiece, according to the analysts from Royal Bank of Scotland, who think the shares offer “a compelling restructuring opportunity” around today’s 95 pence.

Lloyds, say the brokers, is going to recover sufficiently to pay a nominal dividend next year, and something quite substantial in 2011, thanks to margin expansion, cost control and normalising bad debts.

Reality arrives at The Rock

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The surprising thing about Northern Rock’s decision to defer coupons on 1.6 billion pounds of its subordinated debt is the timing — arguably, it’s a miracle investors were getting paid anything at all.

The bank on Tuesday said it would stop paying coupons on various subordinated bank bonds, securities that count as regulatory capital.

from Neil Unmack:

UK mortgage debt: remain calm! All is well!

That's the message given by Moody's today on the resilience of UK mortgage-backed securities to the current downturn. The survey is based on so-called master trusts, a kind of securitization vehicle first applied to U.K. mortgages about a decade ago which quickly became the most efficient way for a large bank to securitize home loans. The master trusts grew so big that they now finance about a fifth of all UK home loans (although a large chunk of this must have been from deals issued by banks after the credit crisis to use as collateral for borrowing with the central banks).

Master trust bonds haven't been immune to the credit crisis. Forced selling by SIVs and funds caused yields on AAA master trust securities to gap out sharply from their low of around a tenth of a percentage point over Libor. Spreads have rallied in recent months, but they are still around 2 percentage points over Libor, largely because many asset managers simply won't touch illiquid asset-backed debt, even if the returns are much higher than equivalent corporate bonds. 

Kingman to go private

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John KingmanSo John Kingman is leaving UK Financial Investments “in due course” to spend more time with the private sector. That, at least, is the line put out by Robert Peston, the BBC reporter who could sometimes be confused for his personal press officer, on his blog.

As Pesto observes:

He’s wanted to move into the private sector for a couple of years – and said as much to the Treasury’s permanent secretary, Nick Macpherson, last summer.

from Neil Collins:

Northern Rock bondholders brace for pain

The shareholders in Northern Rock have been wiped out, but all the various classes of bondholder have - so far - been paid out on time. That may be about to change. The European Commission is about to rule on the sensitive issue of the state aid poured into the failed bank nearly two years ago, and the UK government may offer to bite the bondholders as a quid pro quo for Commission approval.

Last week Fitch downgraded Northern Rock's vast range of debts, arguing that the treatment meted out to Bradford & Bingley would be extended to the Rock. It seems likely that the Rock will be split into a legacy bank containing the 67 billion pounds of old mortgages, while the 20 billion pounds of deposits would go into a new bank.

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