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The Walking Dead: Something is Rotten in the Banking System

Scorpio

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#1
The Walking Dead: Something is Rotten in the Banking System
February 12th, 2016




Pater Tenebrarum: A Curious Collapse – Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared.

Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks.

The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.

Euro area true money supply (excl. deposits held by non-residents) – the action since 2007-2008 largely reflects the ECB’s money printing efforts, as private banks have barely expanded credit on a euro area-wide basis since then- click to enlarge.



Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank’s printing press as a go-between.

As an example here is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks turn the properties into asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo these ABS with the ECB and take the proceeds to buy more Italian government bonds – and back to step one. Simply put, this is a Ponzi scheme of gargantuan proportions.

Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less. Since they have barely expanded credit to the private sector, preferring instead to invest in government bonds, the markets should in theory have little to worry about.



Euro area bank loans to non-financial corporations, with annual growth rate (blue line) – click to enlarge.



In fact, on account of new capital regulations, European banks are almost forced to amass government securities – as government bonds have been declared to represent “risk-free” assets, which reveals an astounding degree of chutzpa on the part of European authorities in the wake of the sovereign debt crisis.

This makes one wonder why the Euro Stoxx Bank Index suddenly looks like this:



The Euro Stoxx bank index has been in free-fall since July – click to enlarge.



Clearly, something is rotten here – but what?



Bail-Ins, Dud Loans, Insolvent Zombies and Hidden Risks
Back in September last year, with the bank index still close to its highs of the year, we referred to European banks as “Insolvent Zombies”. This may have sounded a bit uncharitable at the time, but it is beginning to look like an ever more accurate description by the day. In December, we reminded readers that European banks are still sitting on €1 trillion in non-performing dud loans (see “Still Drowning in Bad Loans” for details).

In January we finally got around to write about the new European “bail-in” regulations, noting that these were bound to bring about unintended consequences. We pointed out that while there is absolutely nothing wrong with exposing bank creditors to risk and sparing taxpayers from involuntarily shouldering same, such an approach would over time likely prove completely incompatible with a fractionally reserved banking system – especially one as highly leveraged and teetering on the brink as that in a number of European countries.

We moreover pointed out that some governments have begun to apply the new regulations in rather arbitrary fashion – for instance as a means to escape guarantees they themselves have extended to creditors. Two recent bank collapses in Portugal and the still festering Heta (formerly HAA) wind-down in Austria served as recent examples.

This seems indeed to be on the minds of investors, who have begun to sell convertible and subordinated bank bonds left and right. And in concert with the decline in bonds and stocks, risk measures like CDS spreads on senior bank debt have begun to surge. Below are several charts we have taken from a recent article by Peter Tchir, who has commented on the situation at Forbes.




I-Traxx senior financials CDS index – this index tracks CDS spreads on the senior debt of 30 major financial institutions – click to enlarge.





Deutsche Bank CoCos: these convertible bonds have special features that allow for “automatic” conversions and the suspension of coupon payments, making them eligible as tier 1 capital under Basel 3. Investors have liked this instruments – until they suddenly stopped liking them.



Mr. Tchir agrees that the arbitrary manner in which bail-ins have been pursued – especially the overnight bail-in of senior



more here guys, pg 2

http://marketdailynews.com/2016/02/12/the-walking-dead-something-is-rotten-in-the-banking-system/
 

BarnacleBob

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I was contemplating the consumer & credit society of western finance & economics, namely the number of personal defaults, bankruptcies, missing wage increases, & low-low credit scores..... Based upon recent data, it seems that 50% - 60% of the adult populations now have distressed or bad credit, but more importantly is the institutions such as banks that are incurring the defaults, bk's & write-offs. As these defaults are charged against the banks "leveraged" capital structure, rendering the bank insolvent if the defaults are continuous.

With the default rates of 50% - 60% of the population, I dont see how the banks cannot be rendered insolvent!
 

Goldhedge

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With the default rates of 50% - 60% of the population, I dont see how the banks cannot be rendered insolvent!
They seem to have mastered the art of suspended animation with regards to the laws of economics.
 

Scorpio

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#4
Average U.S. Consumer Credit Score Is 695 –

By Brian O'Connell Follow | 08/21/15 - 06:37 AM EDT

NEW YORK (MainStreet) -- U.S. consumer credit scores are inching upward, and that's good news for the economy with fiscally responsible consumers who have a much better handle on managing their debt than they did before the Great Recession.

Data from FICO show the following:

- More consumers have a FICO score of 800 or above, 19.9% of consumers in April 2015 vs. 16.9% in October 2005.

- Fewer consumers have a FICO score of below 550, 12.5% of consumers in April 2015 vs. 14.6% in October 2005

- The national average FICO score is at an all-time high at 695, compared to 688 in October 2005.


Ethan Dornhelm, FICO's principal scientist in the firm's analytic development group, notes that the time since the end of the Recession has made a world of difference to American consumers. In fact, they're even seeing significant short term credit improvement.

"As we've observed for several years now, more consumers are scoring 800 or above, currently at 19.9% vs. 19.6% just six months ago," he explains. "And fewer consumers are scoring below 550. In fact, there's been a clear pattern of decline in this segment since the low point of the economy in late 2009 and early 2010."

Some of this trend may be a result of the fact that the lowest-scoring consumers are "dropping out" of traditional credit usage, and by extension, no longer have valid FICO scores, Dornhelm says.

"Still, this decline is encouraging," he says. "It indicates that overall more consumers using credit are managing it responsibly enough to not be among the lowest scorers."

Clearly, Americans are focused on their financial health, and it's starting to pay off. "When I opened my first credit card, I signed up for freecreditscore.com, because I wanted to learn more about how credit works," says Melissa L. Masters, a San Diego, Cal.-based public relations professional. "One thing I learned that I've found people overlook is that you shouldn't close your credit cards - the greater the average age of your accounts, the better your score."

"Another thing I've seen people do is open multiple cards, because they think having more credit cards will help them," Masters adds. "That just drags down the average age of the accounts."

Financial experts say climbing from a 695 FICO score, to one that is 800-and-above, is doable - you just have to go after it.

"The number one thing needed to know for building a better credit score is paying on time every time," notes Andi Wrenn, an Arlington Va.-based financial counselor and a specialist in credit and debt management. "Get your balances below 30% of available credit limits, and have a variety of credit types. This can mean loan, credit card, revolving accounts, and mortgages."

more:
http://www.thestreet.com/story/1326...5-here-are-5-ways-to-get-yours-above-800.html
 

Agavegirl1

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If my credit score was in the 600s I'd freak out. However, now that I only carry any debt month to month and pay it off my score is going down. I use about 10% of my available credit on any random day so that helps. The only thing I can do to bring it up is carry a mortgage so...it is what it is. Having a paid for house is so freeing it is worth it.
 

BarnacleBob

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@ Scorp..... After years in consumer credit, I DO NOT believe those reported FICO scores to be correct.... If they are correct, then why are there so many sub-prime lenders and sub-prime products on the market???

Lending requires major two things to initiate a loan transaction, ability & stability. Today, many cannot produce either....
 

Scorpio

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remember that they recooked the calcs after the recession, in order to expedite repair of credit scores across the board.

Maybe some of our fellas with current information will chime in,