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Some Hard Numbers On The Western Banking System

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Submitted by Simon Black via Sovereign Man blog,
At our Offshore Tactics Workshop in Santiago three months ago, Jim Rickards (author of the acclaimed Currency Wars) told the audience of roughly 500 people– (paraphrased)
‘If one of you stands up right now and heads for the exit, the rest of the audience probably won’t pay much attention. If ten of you do it, one or two people may notice and follow. But if 400 of you suddenly head for the exit, the rest of the audience would probably follow quickly.’
It’s a great metaphor for how our financial system works. The entire system is based on confidence. And as long as most people maintain this confidence, everything is fine.
But as soon as a critical mass of people loses confidence in the system, then it starts a chain reaction. More people start heading for the exit. Which triggers even more people heading for the exit.
This is the model right now across the system. And it’s especially pervasive in the banking system.
Modern banking is based on this ridiculous notion that banks don’t actually have to hang on to their customers’ funds.
Banks in the United States typically hold less than 10%, and even less than 5%, of their customers’ savings. This is particularly true among smaller regional banks.
As an example, BB&T bank is holding about $3.2 billion in cash equivalents on $131 billion in customer deposits. That’s a ratio of just 2.4%.
The rest of customer deposits are mostly invested in residential mortgage backed securities (similar to those which collapsed in 2008) and commercial loans. In fact, the bank’s loan portfolio exceeds total customer deposits. Not exactly the picture of financial health.
In the UK, the situation has become so absurd that British regulators are allowing some banks (Lloyds, Royal Bank of Scotland) to plug their gaping capital deficits with FUTURE earnings.
Now, I’m not trying to badmouth any particular bank here; these example are representative of the entire western financial system.
Yet few people give much thought to where they park their hard-earned savings. We’re deluded into believing that our bank is safe. It must be, after all. It’s a bank! And… it’s backed by the government!
Sure, never mind that the balance sheets of insurance funds and sovereign governments are in even worse shape.
That this system is still functioning at all is due almost entirely to confidence. There is no fundamental support propping it up. And a system built exclusively on confidence can unravel quickly.
This is why it’s so important to give a lot of thought to your financial partner. Do they have a fundamentally safe balance sheet? Or is it just smoke and mirrors?
Take a look at your own bank’s balance sheet. How much cash do they hold as a percentage of deposits? How big is the loan portfolio as a percentage of deposits? How much equity does the bank have as a percentage of deposits?
If you’re not satisfied, find another bank. And you may have to look overseas at stronger jurisdictions.
Singapore is one place where I’m happy to park capital. OCBC for example, holds a whopping 38% of customer deposits in cash equivalents… ten times as much as many banks in the West.
Its total loan portfolio is far less than customer deposits. Total equity exceeds assets by a margin of 2:1. And it resides in a nation with effectively no net debt.
I’m not necessarily endorsing OCBC, but rather citing it as an example of what a healthy bank balance sheet is supposed to look like. Many banks in Singapore hold similar figures.
Bottom line, it matters where you hold your savings. Balance sheet fundamentals are critical.
And moving your hard-earned savings to a well-capitalized, highly liquid bank is one of those things that makes sense, no matter what.
If nothing happens, you won’t be worse off for it. Yet if the confidence game collapses, you’ll be one of the few left standing with your savings intact.

Major Chinese Banks Stop Lending

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Industrial and Commercial Bank of China Ltd
Bank of China Ltd

Bank of China Ltd
Loans to businesses and individuals will resume according to the Bank of China on July 15th. The Industrial and Commercial Bank of China has stated that it is normal for them to put limits on the amount of lending that they do and those limits are set each month. Cases of where the bank has to interrupt their lending have already occurred. However, it would appear that the amount of lending was reduced in comparison with previous months by the banks head office for June. Apparently, the credit line will be reopened in July, but it will be only for a few days as they do not have enough deposits. On June 23rd, the Industrial and Commercial Bank’s customers had trouble withdrawing cash from cash machines and they also did not see bank transfers going through on their accounts on time. The Bank of China suffered the same setbacks on June 24th. Today they have cut loans heightening worry both inside and outside of China as to the stability of the banks. Statements were issued by the banks giving upgrades in IT services as the reason. Rather strange, however, that both banks updated their systems at the same time and suffered the same glitch in the system.
There are two other banks that have interrupted their mortgage loans also: CITIC Bank and Huxua Bank.
Analysts have always stated that the larger banks have stopped lending to smaller banks as they are worried about liquidity and there are deposit issues, but they seem to believe that the large banks will not stop lending to individuals and businesses. Only smaller banks will suffer from the credit crunch taking place in China right now. But, the banks that have halted lending today are not in line with that thinking. The Bank of China, which has existed since 1905, is the 2nd largest lender in China at the present time. It is the 5th largest bank in the world in terms of market capitalization. It employs nearly three hundred thousand people and has total assets to the value of CN¥ 11.829 trillion. That doesn’t sound very much like a small bank. It also has branches in 27 countries around the world. The knock-on effect in those countries will surely be felt too. Investors are not worried for the moment as share value rose today by 3.3%. But, will that continue?
The Industrial and Commercial Bank of China is also one of China’s big four banks (Bank of China, Agricultural Bank of China, and China Construction Bank). It is the largest bank in the world with regard to profit and market capitalization and was listed by Forbes Global 2000 in number one position as the world’s largest public company. It employs four hundred thousand people. In 2010 net lending of the bank stood at 70 billion Yuan, meaning that it lent than any other bank in China. 20% of its lending goes to manufacturing industry and personal loans are over 15% of its business also. It was the world’s largest Initial Public Offering at US$21.9 billion when it was listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange simultaneously in 2006. However, the news doesn’t seem to worry investors for the moment as share value rose by 6.82% today to 4, 700HKD (up 0.3 points).
This is all cause for major concern however. It will be an issue in the coming days, in particular in light of the People’s Bank of China’s recent statements that there was ‘reasonable’ liquidity statement that was issued a couple of days ago. The ‘reasonable’ turned into ‘ample’. Share value is still rising for the moment for both banks, but the Bank of China is below what it was just a few days ago as can be seen in the chart.
Bank of China Ltd

Bank of China Ltd
The Bank of China had already tightened lending in early 2010 in a bid to increase deposits and liquidity. But today the reining in of loans is in a different set of circumstances. The entire banking sector in China is currently strapped for cash and not just one bank.
How much the People’s Bank of China will be able to ward of accusations that there is indeed a big liquidity problem in China today is far from certain.
So, the options that are open to businesses and individuals? Unless the People’s Bank of China comes up with some cash to unfreeze the situation and double-quick, the Chinese (but, unfortunately, not only the Chinese) had better start popping down to the pawnbrokers and speaking to Uncle. Otherwise it looks as if they are in for a rough time. If money dries up in those two banks and continues, then small and medium sized businesses are likely to suffer and there will be a bank-run on. Don’t envy them at all for that. We could always send Ben Bernanke, couldn’t we? He will sort the problem out in true Federal-Reserve fashion. Uncle Ben would be a better option than the pawnbrokers maybe for some!  He may be looking for a short stopover in Shanghai when his stint at the Federal Reserve is up in 2014.

“Time Is Running Out Fast” For Italy

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Everyone knows Europe is insolvent; the only question is "when" will Europe be forced to finally admit this truism. The long overdue house of cards may start toppling in as little as 6 months, as The Telegraph reports,Mediobanca's 'index of solvency risk' suggests "time is running out fast" for Italy. With the breakdown in Eurozone talks on a banking union and the Fed's shift in policy, Europe "has become a dangerous place," warns RBS. Unless Italy can count on low borrowing costs and a broad recovery, it will "inevitably end up in an EU bailout." The current situation is as bad as when the country was blown out of the ERM in 1992 as "the Italian macro situation has not improved...rather the contrary; with 160 large corporates in Italy now in special crisis administration." If the ECB doesn’t act, one analyst warns (pleads) it could see all the gains of the past nine months vanish in two weeks. Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. "Argentina in particular worries us, as a new default seems likely."
“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”
The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery.
Emphasising the gravity of the situation, it compared the crisis with when the country was blown out of the Exchange Rate Mechanism in 1992 despite drastic austerity measures.
...
“The European Central Bank needs to take very aggressive steps to offset this,” said Marchel Alexandrovich from Jefferies Fixed Income. “We have a sell-off across the board. If the ECB doesn’t act, it could see all the gains of the past nine months vanish in two weeks, taking the eurozone back to square one.”
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“We have clear signs in global finance of a generalised meltdown in assets right now.”
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Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”
Mr Guglielmi said Italy’s industrial output has slumped 25pc from its peak in the past decade, while disposable income has dropped 9pc and house sales have dropped to 1985 levels.
The 1992 crisis was defused by a large devaluation, allowing Italy to restore trade competitiveness at a stroke. Mediobanca said: “The euro straitjacket is clearly not providing a similar currency flexibility today. With the lira devaluation Italy managed to inflate debt away, which it cannot do today. It could take more than 10 years to revert to pre-crisis output levels. 

http://www.zerohedge.com/news/2013-06-25/time-running-out-fast-italy

Bank Of China Declares Moratorium On Transfers, Online Banking; Counters Inoperable

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From Caijing, google translated. We hope the gist of the narrative in Mandarin is far less scary, because if the translation is even remotely accurate, then all hell may be about to break loose in China.
From Caijing: Bank of China, Bank of suspension of transfers morning counters were unable to apply for online banking
Update: Customer service said, now silver futures transfer service has been fully suspended, online banking, the counter can not be handled, and now has the background system response, recovery time is not yet known
Following the ICBC, the Bank of China also go awry again. This morning, the Bank of China Bank moratorium on transfers, online banking, counters are inoperable.
10:00 many, many people began to receive messages sent to the Bank of China, "the end result of the Bank of China Bank failures, bank customers can not carry on through the Bank transfers, please Bank online banking, bank counter or use of other bank transfer system, Bank system will be restored promptly notify you." large number of transfer business banking needs of the people turned to online banking, counter, but according to the instructions of the public still found text messages can not handle.
Reporters call the BOC, customer service said, now silver has been fully suspended phase transfer services, online banking, the counter can not be handled, and now has the background system response, recovery time is not yet known.
As of 12:00, the Bank customer service said handle part of the user's online banking has been restored.
Just yesterday, 10:35, Shanghai and other places ICBC system failures, ATM machines, POS machines, online banking appeared paralyzed more than 50 minutes, all kinds of businesses can not properly handle.
The ICBC bank system failure comes trouble "money shortage", inevitably lead to speculation that many people guess the bank is not money.
To solve this problem, ICBC relevant person in charge told reporters that morning, business process slow, the analysis on the host software upgrade, emergency treatment, 11:27 various businesses all returned to normal.
As for speculation that the crash might be the last two days the inter-bank "money shortage" relevant, ICBC has denied
h/t Sean Corrigan

http://www.zerohedge.com/news/2013-06-24/bank-china-declares-moratorium-transfers-online-banking-counters-inoperable

BIS says central banks must stop supporting economy

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The Bank for International Settlements (BIS) says banks have done their bit to help economic recovery and governments must do more.
The Basel-based organisation - usually dubbed the "central banks' central bank" says it is time for them to stop pumping funds into their economies.
Markets are already bracing themselves for a world without central bank help.
Last week the US central bank said it planned to stop pumping money into the economy, sparking market volatility.
In its annual report, the BIS said the world's central banks had done their bit to offset the worst effects of the six-year long global credit crisis.
As the credit crunch bit, central banks tried a number of tactics to try to keep the money flowing, initially cutting interest rates and later adding in quantitative easing, buying in assets and releasing vast sums into the banking system.

'Forceful'

The BIS said it was now the turn of governments to oil the economic wheels.
It said this should be done through labour market reforms to increase productivity.
It said they should undertake a "forceful programme" of "repair and reform", as this was the only way to bring about a lasting economic revival.
It said: "Although six years have passed since the eruption of the global financial crisis, robust, self-sustaining growth still eludes the global economy.
"During this time, central banks in advanced economies have been forced to look for ways to increase their degree of accommodation. But central banks cannot solve the structural problems that are preventing a return to strong and sustainable growth."

Cheap

The BIS said central bank action had borrowed "time for others to act, allowing them to repair balance sheets, to consolidate fiscal balances, and to enact reforms to restore productivity growth".
But Stephen Cecchetti, the head of the BIS monetary and economic department, said this had made it easy for the private sector to put off reforms and for governments to finance deficits more cheaply thanks to the low interest rates their actions had introduced.
Mr Cecchetti said central banks must return their focus to maintaining financial stability and encouraging reforms, rather than "retarding them with near-zero interest rates and purchases of ever larger quantities of government securities".
The BIS was founded in 1930 and is the world's oldest international financial institution.
Its 60-strong membership includes the Bank of England, the European Central Bank, the US Federal Reserve, the People's Bank of China and the Bank of Japan.

Liquidation – Stocks, Bonds, Commodities Collapse

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As we warned earlier in the week, Greece is notably missing its Troika goals and the issue just became a lot more critical. AsThe FT reports, the IMF is preparing to suspend aid payments to Greece over what it claims is a EUR 3-4 billion shortfall that has opened up. Between healthcare budget shortfalls, central banks refusing to roll-over Greek bonds, and amid signs that even the scaled-back privatization plans that Athens had agreed to being behind schedule, the IMF -following its own admissions of mistakes in the Greek bailout, has warned EU officials the shortfall will require it to stop aid payments by the end of July. The equity market is already reacting (as is EURJPY - EUR weakness against the big carry pair) to this re-awakening of EU event risk (and the awkward timing with Merkel's election so close) - with the Fed's comfort blanket somewhat removed.
Via The FT,
The International Monetary Fund is preparing to suspend aid payments to Greece by the end of next month unless eurozone leaders plug a €3bn-€4bn shortfall that has opened up in Greece’s €172bn rescue programme, according to officials involved in management of the bailout.
The gap emerged after eurozone central banks refused to roll over Greek bonds they hold, and comes amid signs that even the scaled-back privatisation plan Athens agreed to last year is falling behind schedule.
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The shortfall will force eurozone finance ministers to discuss “alternate sources” of funding
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But the timing is particularly awkward as Germany is holding parliamentary elections on September 22. In the run-up to polling day Chancellor Angela Merkel will be loath to submit any further aid request to the Bundestag where it would likely be highly controversial.
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the IMF has warned EU officials the gap will require it to stop aid payments at the end of July, said a person involved in the discussions.
Under its rules, governments must have at least 12 months of financing in place to receive IMF disbursements under a bailout programme. This latest shortfall of €3bn-€4bn means that Greece’s financing needs are only covered up to the end of July 2014.

http://www.zerohedge.com/news/2013-06-20/stocks-plunge-imf-tells-greece-plug-holes-or-it-pulls-plug

What The Recent Surge In Rates Means For Your Home Purchasing Power

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Contrary to what one may have read in the financial tabloids, a houseing market does not recover thanks to Fed-subsidzed REO-to-Rent loans used by the biggest private equity firms to buy up distressed property on the margin, by foreign oligrachs buying Manhattan triplexes sight unseen just to park 'tax-evaded' cash courtesy of the NAR's anti money-launderingexemption, and by foreclosure stuffing from the big banks desperate to subsidze the market higher before the sell into it. The recovery comes from the average consumer, who has disposable income and savings (in a hypothetical scenario of course) and who can buy houses based on a given monthly budget - a budget which must provide a better deal to own than to rent.
The problem with such a budget is that first and foremost its purchasing power is dependent on interest rates, and in an economy in which leverage is everything, rising rates mean a collapse in purchasing power. Here is a glimpse of what has happened to the mortgage rates in the past month alone: from Bloomberg's Jody Shenn:
Wells Fargo & Co., the largest U.S. mortgage lender, is offering 30-year fixed-rate loans at 4.5 percent, according to its website, up from 4.13 percent on June 18 and 3.88 percent on May 22, when comments by Bernanke to lawmakers and the release of the minutes of the last Fed meeting caused bonds to plummet. Freddie Mac’s survey, which is lagging behind the bond slump because it reflects originator responses through yesterday, showed average rates falling to 3.93 percent this week.
So in one month, the average 30 year fixed rate mortgage has jumped by over 60 basis points. What does this mean for net purchasing power? Well, as the chart below shows, assuming a $2000/month budget to be spent on amortizing a mortgage (or otherwise spent for rent), it means that suddenly instead of being able to afford a $425K house, the average consumer can buy a $395K house.
This means that, all else equal, housing just sustained a 7% drop in the average equlibrium price based on what buyers can afford.
But assuming the current selloff in rates continues, things are going to get much worse: we may be seeing 5%, 5.5% even 6% and higher mortgages in the immediate future.
It also means that a buyer who could previously afford a $506K house with a $2,000 monthly budget at an interest rate of 2.5% will be able to afford only $316K if and when the average 30 Year fixed hits 6.5%: a 40% drop in affordability based on just a 4% increase in interest rates!
And this is bullish for the economy?

Imminent US real estate market crash

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Imminent US real estate market crash

  1. Lumber is near term low, which usually tracks with homebuilders.  Very simple to understand, lumber is still primary material to build houses.  Housing recovery built on faith
  2. Institutional players entered market such as BlackRock and JPMorgan (and many others) now exiting.  Smart money getting out of stocks and real estate These new investor buyers have been artificially inflating the market in many areas.
  3. Fed policy – Fed will stop buying mortgage securities  This will drive the cost of financing through the roof.
  4. Demographic shift, baby boomers retiring and new generation not buying more houses.
  5. Lack of foreign support – Due to a global tax witch hunt, and a European banking crisis, foreigners who previously supported US market will support to lesser extent
  6. Job crisis – while unemployment figures officially claim we have a job recovery, companies are laying off workers in record amounts.  Unemployed people don’t buy houses.  Workers who are laid off may have to sell their house.
  7. Bond market collapse – For those retirees who keep their money in bonds, with the pending bond market crash they will have less money to pay for their houses.

http://ih.advfn.com/daily/eliteforextraining/1710/imminent-us-real-estate-market-crash

Fed much more upbeat about outlook

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WASHINGTON (MarketWatch) — The Federal Reserve on Wednesday signaled greater optimism about the economic outlook, forecasting that the unemployment rate could fall to 6.5% by 2014, one year sooner than the central bank had previously estimated.
In its policy statement, the Fed said downside risks to the outlook had diminished and that the labor market had shown further improvement.

Rick Santelli Rages: “What Is Bernanke So Afraid Of?”

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The following three minutes of absolute perfection uttered by CNBC's Rick Santelli is dangerous for anyone living in Kyle Bass' "intellectually dishonest" alter-world of denial and "unicorns and rainbows" as the Chicagoan goes off on theignorance of everyone in these so-called markets. When every talking head is bullish and the world is going so great that we should all "buy stocks," Santelli demands we ask Bernanke - "what are you scared of," that keeps you pumping this much money into the system for this long? Simply put, Santelli's epic rant is the filter that every investor (or member of the public) should be viewing financial media and the Fed today (or in fact every day).
On CNBC and all the channels that cover business, we have person after person after person, buy side, sell side, upside, downside:
  • How is the economy? Economy is great.
  • What about stocks? You got to buy them.
  • What if they break? You have to buy the dips.
  • What's wrong with the economy? I don't hear these people saying anything is wrong with the economy.
So what's wrong, Ben? Why can't we get out of crisis management mode?
There's always going to be something.
...
Why don't these people kick the tires?
They take a press release from the Federal Reserve and they think it was written by God.

One of Rick's most epic rants to date:

http://www.zerohedge.com/news/2013-06-19/rick-santelli-rages-what-bernanke-so-afraid

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