Will Share Prices of Global Banks Breakdown Together?

 

What he forgot to add is that inflation must always end in a crisis and a slump, and that worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of “capitalism”—Henry Hazlitt 

 

Will Share Prices of Global Banks Breakdown Together? 

 

The index of stocks of Europe’s banks broke down to a record low last week, amplifying risks of the doom loop.  

 

The doom loop, according to SWFI, “In the context of economics, a doom loop is a negative spiral that can occur when banks hold sovereign bonds and governments with weak public finances bail out such banks. European area governments are growing concerned about the doom loop between large banks and governments. Governments are exposed to bank risk, as well as banks are exposed to sovereign risk by holding government bonds in their portfolios. Other names for the doom loop include the “diabolic loop” and “vicious circle”.” 

 

Interestingly, shares of the US counterparts (the KBW Index  or the BKX), which barely participated in the recent record run by its key indices, weakened too… 

 

Banks provide the core of financing in Europe compared to the US, which increasingly relies on capital markets.  

 

The fragility of shares of banks encompasses Japan’s Topix Bank Exchange Index as well as Hong Kong’s Hang Seng China H Financial Index, which incidentally has been adrift close to the support, or multi-year level low levels. 

  

COVID and its political responses have not been responsible for the structural vulnerability of bank shares. Instead, the trend has been enhanced and accelerated by it. 

 

And the near synchronous price actions exhibit the structural interconnectedness brought about by financial globalization that comprises the offshore dollar (Eurodollar) system.  

 

Of course, because the domestic banking system interacts with its global peers, and which underlying financial and monetary policies, likewise, resonate with them, the share prices of local banks manifest the same infirmities. The PSE financials are, like their brethren, also ambling at multi-year lows. 

 

Will global bank shares breakdown together? 

 

Decoupling, anyone?

 

Quote of the Day: Paying people to borrow money is just crazy; No Money Down Loan Philippine Edition

Sovereign Man's Simon Black on a 2008 Déjà vu bubble but at a larger scale: 

This feeling was only reinforced when I whipped out my phone and saw that German bank Berlin Hyp had just issued 500 million euros worth of debt… at negative interest.

I wondered if I really did go through a time warp, because this is exactly the same madness we saw ten years ago during the housing bubble and the subsequent financial crisis.

To explain the deal, Berlin Hyp issued bonds that yield negative 0.162% and pay no coupon.

This means that if you buy €1,000 worth of bonds, you will receive €998.38 when they mature in three years.

Granted this is a fairly small loss, but it is still a loss. And a guaranteed one.

This is supposed to be an investment… an investment, by-the-way, with a bank that almost went under in the last financial crisis.

It took a €500 billion bail-out by the German government to save its banking system.

Eight years later, people are buying this “investment” that guarantees that they will lose money.

The bank is now effectively being paid to borrow money.

We saw the consequences of this back in 2008.

During the housing bubble, banking lending standards got completely out of control to the point that they were paying people to borrow money.

At the height of the housing bubble, you could not only get a no-money down loan, but many banks would actually finance 105% of the home’s purchase price.

They were effectively making sure that not only did you not have to invest a penny of your own money, but that you had a little bit of extra cash in your pocket after you bought the house.

Paying people to borrow money is just crazy, whether it’s homebuyers, bankrupt governments, or banks.

Global insurance giant Swiss Re calculated that roughly 20% of all government bonds worldwide now have negative yields. And over 35% of Eurozone government bonds have negative yields.

(They would know—along with pension funds and banks, insurance companies are some of the largest buyers of bonds.)

With this deal, Berlin Hyp becomes the first non-state owned company to issue euro-denominated debt at a negative yield.

They won’t be the last.

We’re repeating the same crazy thing that nearly brought down the system back in 2008—paying people to borrow money.

The primary difference is that, this time around, the bubble is much bigger.

Back then, the subprime bubble was “only” $1.3 trillion.

Today, conservative estimates show that there’s over $7 trillion in negative rate bonds.

What could possibly go wrong?

I recently received a text message...

...which indicated of an offer for Philippine properties (high end condos for sale) financed by NO money down loan. So people are being "paid" to borrow money to buy Philippine properties. And that's how Philippine corporate sales and profits are being generated. And most importantly, that's the essence of the real estate-shopping mall propelled domestic demand boom: a credit bubble

Ironically, Mr. Black warned of this in 2014.

Asian Banking: China and Asian Banks Fill Void Left by European banks

Nature abhors a vacuum.

In Asia, the Bank of International Settlements recently remarked that China and Asian banks filled the void left by retrenching European banks

The Central Banks News notes…

A pullback by Swiss and euro area banks from Asia-Pacific has been countered by an expansion of local banks, including Chinese and offshore centers, resulting in a continuous rise in international credit to the booming region, the Bank of International Settlements (BIS) said.

Fears of a lack of funding in Asia-Pacific due to the retrenchment of European banks after the global financial crises and the euro area’s debt crises thus never materialized….

The statistics…

Foreign lending to Asia Pacific rocketed by 41 percent, or $613 billion to total outstanding claims of $2.1 trillion by mid-June 2012 from mid-2008, just before the collapse of Lehman Brothers, BIS said in its December quarterly review.

This expansion is in stark contrast to a drop in international lending to emerging Europe of 14 percent, or $230 billion, and a more modest increase in lending to Latin America of 24 percent, or $254 billion, in the same period.

In Asia Pacific, the total claims of euro area banks shrank by an estimated 30 percent, or around $120 billion, between mid-2008 and mid-2012 and their share of foreign lending fell from 27 percent  to 13 percent by mid-2012, BIS said.

More stats…

Drawing on other sources, such as Bankscope, BIS found that the unconsolidated total assets of Chinese banks’ foreign offices in Asia (excluding Singapore) grew by $135 billion, or 74 percent, from 2007 to 2011.

And based on data from Dealogic, BIS learned that Asian banks, including those from Hong Kong and Singapore, increased their syndicated loans to emerging Asia Pacific by 80 percent, or $223 billion, from 2007 to 2001. Asian banks' share of total signings rose to 64 percent from 53 percent.

Insights to draw from the above.

Unlike mainstream thinking, Chinese and Asian banks’ picking up of where European banks vacated signifies as spontaneous market action at work. This has essentially dissipated “fears” over the lack of funding. Again, nature abhors a vacuum.

The withdrawal of European banks in Asia may perhaps be read as “home bias”. Due to the ongoing crisis, European banks may have taken a defensive posture or may have reconfigured their corporate strategies to optimize on their competitive advantages on the domestic arena or has been made to raise capital by reducing expenses and by taking lesser external risks.

Yet such void presented an economic opportunity for Chinese and Asian banks. The report does not indicate that the actions of Asian banks have been under the directives of respective governments.

Also, the increasing role of China’s banks in providing financial intermediation to Asia has been consistent with her government’s push to promote the yuan as an international reserve currency. Deepening trade and financial relations and exposures will help promote regional currency based transactions.

On the other hand, this again reveals of the paradox between China’s militant regional (territorial claims) policy and economic and financial relations with the region—another instance of Dr Jekyll and Mr. Hyde relationship.

Importantly, this report shows of the deepening trend of financial integration in the region. The implication is that regional markets will be more correlated and more intertwined which should optimize the region’s economies of scales and hasten the financial and economic development

Alternatively, greater interconnectivity and interdependence infers to greater contagion risks.