Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!

Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital.   In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%.  The trend is unmistakable:  the more government has regulated bank capital, the less capital banks have ended up holding—Mark A. Calabria

Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!

Lost in the din of the holiday season and the embellishment of the Philippine financial markets has been the announcement of the Bangko Sentral ng Pilipinas (BSP) to ease capital regulations of the banking system.

From the BSP: (December 13, 2018) [bold added]

The Monetary Board approved the Philippine adoption of the Countercyclical Capital Buffer (CCyB) intended for universal and commercial banks (U/KBs) as well as their subsidiary banks and quasi-banks.

The CCyB will be complied with by the banks using their Common Equity Tier 1 (CET1) capital. During periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy. During periods of continuing expansion, the CCyB may be raised which has the effect of setting aside capital which can be used if difficult times ensue.

BSP Governor Nestor A. Espenilla Jr. noted that “the CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periodswithin the financial cycle.”

The CCyB is set initially at a buffer of zero percent. This is in line with global practice. It also suggests that the Monetary Board does not see the ongoing build-up of credit as an imminent risk that would otherwise require an increase in the capital position of banks. The buffer, however, will be continuously reviewed by the BSP. Banks will be given a lead time of 12 months in the event that the CCyB buffer is raised. However, when the buffer is reduced, it takes effect immediately.

Designed to “counter the common occurrence of boom-and-bust periods”, the BSP essentially admitted that “boom-and-bust periods within the financial cycle” exists!

Financial bubbles, even from the BSP perspective, exists!!!

And though the BSP denies “the ongoing build-up of credit as an imminent risk”, it has taken up measures to ease capital buffers by “providing the affected banks with more risk capital”.

Or in times of stress, the BSP’s initial steps to bailout the banking system would be to lower its capital buffer/reserve requirements!

Such resonates with the Financial Stability Coordinating Council’s conclusion in its FSR report…

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner

Pieces of the jigsaw puzzle are falling into place!

And here’s the thing.

No banks would publicly admit that they are undergoing stress. If they do, they become prone to runs.

The CCyB, thus, has been engineered as part of the BSP’s legal framework to conduct the bank bailouts in reticence or away from public scrutiny.

What would affected banks do with the release of more risk capital?

Whether the banks use such capital to do more lending or to conduct financing of its operations, well, the short answer is to provide liquidity to a bank in stress!

Figure 1

Ever since the banking system shifted to put almost all its egg in the loan portfolio, the industry’s most liquid assets continue to drain. In 2018, this phenomenon has only accelerated. [See figure 1]

The BSP’s data on the Banking System’s balance sheet and income statement can be found here and here.

Though the BSP admitted to the “occurrence of boom-and-bust periods”, it doesn’t address the possible sources here of the banking stress, except “build-up of credit”.

Why would there be a disproportionate amount of a “build-up of credit” that raises systemic risks enough for the BSP to launch CCyB?

And given the current operating conditions of the banking system, regulatory relief would translate to even more mounting “build-up of credit” in the face of less capital!

And as further proof that money printing is the only thing central banks know, the BSP ceased increasing or kept policy rates as is this week!

Figure 2

And the result? Yields of long term bonds started to creep higher!

What has been the striking is the stunning collapse in the spread between the 20-year and 6-month, 1- and 2-year notes!

The fixed income markets have been facing considerable stress!

Figure 3

And despite the stunning “compelled” serial orchestrated pushing up of the national equity index and on PSYEi 30 banks, shares of non-PSYEi 30 banks of the Bank index have barely joined the shindig! [Charts: Why the Janus-Faced Banking Stocks? PSEi Banks Versus The Rest November 26, 2018]

The question is why?

Outside mainstream ken, this would be the second major bailout by authorities channeled through the easing of the regulatory regime. In this 2nd case, again, banks would be allowed to ABSORB more risks than necessary by scaling down its capital reserves.

Again, why?

Great “boom” stuff, no?

The first regulatory bailout/relief was implemented by the Insurance Commission on Pre-Need Firms [See Insurance Commission Launches Regulatory Bailout of Pre-Need Firms, The Twin of Unbridled Fiscal Spending is High Inflation, The Coming StagflationNovember 18, 2018]

Figure 4

The reasons behind such regulatory bailout/relief reinforced by the 3Q performance of Non-Bank Quasi Banks (NBQB)

-Continuing Profit Drought (published Net income after taxes: -10.8% 3Q, -11% 2Q and -6.6% 1Q)

-Persisting Liquidity Drain (published cash and due banks: +.6% 3Q, -.8% 2Q and -1.6%) and

-Rising Distressed assets (21.3% 3Q, 20.7% 2Q and 21.2% 1Q)

Distressed assets are defined as NPLs plus ROPOA (Real and Other Properties Owned and Acquired), gross and restructured loans, current

Pls find the BSP’s Non-Banking Quasi Banks (NSQB) balance sheet and income statement here and here

These measures do little but to postpone and aggravate systemic maladjustments.

100% of the Week’s 1.27% Returns Came from Pumps (Mostly Sy Group)! The Flattening Treasury Curve is AOK?

100% of the Week’s 1.27% Returns Came from Pumps (Mostly Sy Group)! The Flattening Treasury Curve is AOK?

The Phisix surged 1.27% or by 93.21 points.

How was it accomplished?

In greeting the last month of the year, the headline index sprinted by 4.51% in just two days.

 

Orchestrated mark-the-closing pumps on mostly SY owned firms were responsible for these fantastic gains. A total of 108.55 points were unnaturally added to the 2-day gains

In the next 3 days. the headline index gave back 72% of these gains.

 

The net weekly pump of 95.37 was larger than the weekly gain of 93.21 points. With ends-session pumps greater than headline gain, what kept the PhiSYx afloat had nothing been more than blatant price fixing. Including the top 3 issues of the Ayala Group, market share cap of the PSYei was last at 51.12%!

Six issues determine the fate of the headline index.

These are facts. All one has to do is to go to the PSE website.

These activities reveal that because most composite issues haven’t been participating in the forced upside push, the same 6 issues have been used to keep the headline index at the current levels.

Even as the Phisix raced to 9,058 in January, the broader market sold off.

Deliberate or engineered pumping only exhibits the degree of dysfunction of the domestic stock markets.

And the amassing of market cap shares by the elite 6 wouldn’t have repercussions?

When the PhiSYx raced to 9,000 last January, the befuddled Financial Stability Coordinating Council wrote this:

Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is a Minsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution

Operating under the rational expectations theory, the authors saw the patent mispricing as a function of the “absence of clear-cut valuation measures”.  It is not.

They didn’t or refuse to see that one of the principal causes of valuations overreach has been the unbridled price fixing. And by distorting prices, not only have overvaluations been attained, such mispricing have spurred massive misallocations of capital.

And the sustained manipulation of the market signals has only exacerbated such imbalances. Even more, the concentration of market cap share to only a few issues makes the headline index vulnerable to any volatility that may arise from these issues.

The PSYei 30 has been borrowing significantly more than the net income it generates. And this understates the point that the aggregate net income growth has been a function of increased gearing. Through the 3Q, non-bank PSEi borrowed Php 515.4 billion to generate 28.32 billion of net income. Php 18.2 borrowed for every net income it generates!

No wonder the engineered upward thrust has been required to support the index. Artificial profits must be supported by price fixing to exhibit everything is A-OK

But has everything been a-Ok? Surely not for the banks.

There would be major inversions on the curve soon should the current flattening dynamic persists! 

This reminds me of the FSCC’s FSR:

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.

The Phisix raced to 9,058 last January even as “dislocations of crisis proportions have come as a surprise”.

Sure anything can happen to the markets. But what is unsustainable will soon stop,