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The Next Chapter: Navigating Economic Uncertainties as The Fed Facility Anniversary Looms
A Banker’s Guide to Prudent Risk Management in 2024
As we approach the one-year anniversary of the Federal Reserve’s emergency lending facility, a wave of uncertainty washes over the financial landscape. Memories of hundreds of U.S. banks clinging to its lifeline for survival are still fresh, serving as a stark reminder of the economic precipice we teetered on. While immediate panic has subsided, the question lingers: what happens next?
With 2024 drawing near, business leaders, particularly those in the banking sector, must adopt a proactive and strategic approach to risk management. As an economic and banking expert, I’m here to equip you with the insights and actionable steps needed to navigate the potential economic headwinds, protect your business, and emerge stronger in the coming year.
Understanding the Landscape:
The Fed’s Emergency Lending Facility: In the face of the unprecedented economic crisis triggered by SVB collapse, the Federal Reserve launched the Primary Dealer Credit Facility (PDCF) in March 2023. This lifeline provided crucial liquidity to hundreds of U.S. banks, preventing widespread bankruptcies and systemic collapse.
Lingering Uncertainties: While the PDCF served its purpose, it also masked underlying vulnerabilities within the financial system. High debt levels, geopolitical tensions, and ongoing supply chain disruptions continue to cast a shadow of uncertainty. The potential for inflation to reignite and the looming expiration of some pandemic-era support measures add further fuel to the anxiety fire.
Navigating the Risks:
As business leaders, you cannot afford to be passive observers in this turbulent landscape. Here are some key risk management actions you should prioritize:
1. Strengthen Your Balance Sheet: Now is not the time for aggressive expansion. Focus on shoring up your capital reserves, reducing bad debt, and maintaining healthy liquidity ratios. This will provide a buffer against potential shocks and ensure you have the resources to weather any coming storms.
2. Diversify Your Income Streams: Overdependence on any single market or customer segment can leave you vulnerable to unforeseen downturns. Explore new avenues for revenue generation, expand your product offerings, and enter new markets to mitigate risk and secure sustainable growth. Lloyds Bank is planning on being biggest single-family house owner with a portfolio in excess of 10000 properties.
4. Prioritise Communication and Transparency: Open and honest communication with stakeholders, including employees, investors, and regulators, is crucial during times of uncertainty. Be proactive in sharing your risk assessments, mitigation strategies, and contingency plans to foster trust and confidence.
5. Embrace Agility and Adaptability: The economic landscape is constantly evolving, and businesses need to be agile enough to adapt. Foster a culture of innovation, encourage proactive problem-solving, and empower your teams to respond quickly and effectively to changing circumstances.
What the Future Holds:
Predicting the future is an uncertain business, but one thing is clear: a period of continued economic volatility lies ahead. By acknowledging the lingering risks, adopting a proactive approach to risk management, and implementing the actionable steps outlined above, you can position your business for success in the face of adversity.
Remember, resilience is not just about weathering the storm; it’s about emerging stronger on the other side. Embrace the challenges, seize the opportunities that arise, and lead your business through this period of uncertainty with confidence and a clear vision for the future.
This article is just the beginning of the conversation. We are providing risk management insights and guidance needed to navigate these turbulent times. Don’t hesitate to reach out for further consultations or tailored risk management strategies specific to your business needs. Together, we can navigate the complexities of the coming year and ensure your business not only survives but thrives in the new economic landscape.
Are you an ordinary business leader not involved in banking? What does all this mean for you and your business?
While the immediate threat of widespread bank failures due to the expiration of the Fed’s emergency lending facility has subsided, the potential for instability in the U.S. banking sector could still have significant impacts on ordinary business leaders, even if they’re not directly involved in finance. Here’s how:
1. Tightened Credit Access: If banks become more cautious due to economic uncertainties or increased regulations, lending might become stricter. This could make it more difficult for businesses to obtain loans and credit lines, hindering their ability to invest, expand, or even maintain ongoing operations. The money supply in America has already died and businesses are suffering major drought in money supply
2. Increased Borrowing Costs: If banks perceive higher risks in the market, they might raise interest rates on loans. This could make borrowing more expensive for businesses, further squeezing profit margins and potentially forcing them to raise prices or cut back on expenses. The cost of money has already jumped in 2023.
3. Disruptions in Financial Services: Bank failures or financial instability could cause disruptions in essential financial services like payroll processing, money transfers, and access to capital markets. This could create operational challenges and delays for businesses, impacting their cash flow and overall efficiency. Hundreds of banks, mainly regional banks, are in danger of bankruptcy.
4. Reduced Consumer Confidence: Widespread concerns about the banking sector could dampen consumer confidence, leading to decreased spending and a slowdown in economic activity. This can directly impact businesses that rely on consumer demand, resulting in lower sales and revenue. Consumers seem to be immune from realities of their future and continue to spend but savings are running out and much of the spending is on record high credit card bills.
5. Uncertainty and Market Volatility: Increased anxieties about the financial system can lead to market volatility and instability. This can make it difficult for businesses to plan for the future and invest with confidence, further hindering economic growth and job creation.
However, it’s important to remember that these are potential consequences, not inevitable outcomes. The extent of the impact on ordinary businesses will depend on various factors, including the severity of any banking sector issues, the effectiveness of government interventions, and the overall resilience of the economy.
Here are some steps ordinary business leaders can take to mitigate the risks:
Maintain strong financial fundamentals: Focus on building cash reserves, reducing debt, and operating efficiently to weather potential disruptions.
Diversify funding sources: Explore alternative financing options beyond traditional bank loans, such as crowdfunding, angel investors, or venture capital.
Build strong relationships with your bank: Maintain open communication with your bank and ensure they understand your business needs. This can help you secure credit in times of uncertainty.
Develop contingency plans:Be prepared for various scenarios, including disruptions in financial services or a slowdown in economic activity. This will allow you to react quickly and effectively to challenges.
The Delusion of Certainty: Why Central Banks Can’t (and Shouldn’t) Predict the Future
My esteemed colleagues, I stand before you today to shatter a persistent illusion – the myth of central bank infallibility. Economists hang on central bank leaders every word and economic risk analysis, when they are rarely right. Some saying they are deliberately wrong for political reasons. Others that they are incompetently wrong. Either way they are normally wrong in their economic risk analysis.
For years, we’ve treated pronouncements from the Federal Reserve, the European Central Bank, and the Bank of England as gospel, their economic forecasts swaying markets and shaping our investment decisions. Yet, with each passing year, a stark reality emerges: central banks are demonstrably, embarrassingly bad at predicting the future.
To dismantle this fallacy, let’s not dwell on abstract statistics. Instead, let’s embark on a cautionary tale, delving into three concrete examples, each a testament to the folly of relying on central bank pronouncements.
Exhibit A: The ECB’s Inflation Misfire
Remember 2020? As the pandemic swept across Europe, the European Central Bank, under Christine Lagarde’s leadership, assured us that inflation would remain subdued, even dip below their target of 2%. They argued that the economic slump would dampen price pressures, lulling businesses and policymakers into a state of comfortable complacency. Fast forward to 2023, and reality bites with the force of a tidal wave. Eurozone inflation sits at a record-breaking 10.6%, shattering the ECB’s predictions and triggering an economic maelstrom. Businesses grapple with skyrocketing costs, eroded profits, and consumer anxieties, all while the ECB scrambles to contain the inflationary fire it downplayed for far too long.
Exhibit B: The Bank of England’s Brexit Blundermark
Across the English Channel, the Bank of England, led by Mark Carney, infamously predicted a 7.5% contraction in GDP immediately following the UK’s Brexit vote in 2016. This dire pronouncement sent shockwaves through markets, prompting businesses to freeze investments and consumers to hoard cash. Yet, reality once again defied the Bank’s doomsday prophecy. The UK economy exhibited remarkable resilience. Growth slowed, but nowhere near the predicted freefall. The Bank’s miscalculation not only caused unnecessary panic but also cast a long shadow of doubt on its economic forecasting prowess – and political independence or lack there of.
Exhibit C: The Fed’s 2008 Blind Spot
Returning across the Atlantic, let’s rewind to 2008. The Federal Reserve, then led by Ben Bernanke, consistently downplayed the severity of the subprime mortgage crisis, assuring markets that the housing market slowdown was “contained.” They maintained this rosy assessment even as ominous warning signs, like falling home prices and spiking delinquencies, became increasingly visible. This failure to recognise the looming crisis had catastrophic consequences. The US economy plunged into the Great Recession, triggering global financial turmoil and widespread economic hardship. The Fed’s miscalculation is a stark reminder that even the most powerful central banks can be blinded by hubris and misstep disastrously. The banking system has yet to fully recover from the 2008 financial crisis.
These are not isolated incidents. They are a recurring theme in the history of central banking. Time and again, pronouncements from these supposedly august institutions have proven spectacularly inaccurate, leading businesses astray and fueling market volatility.
So why are central banks so consistently wrong? The answer lies in the inherent complexity of the economic system. It’s a dynamic beast, with countless moving parts and unpredictable human actors. To attempt to predict its future with any degree of certainty is akin to navigating a fog-shrouded ocean with a broken compass.
But this doesn’t absolve central banks of their responsibility. Their pronouncements, however flawed, carry immense weight. Businesses make strategic decisions based on them, investors adjust their portfolios, and entire economies react. When these pronouncements turn out to be wrong, the consequences can be severe.
What, then, is the takeaway for astute business leaders like yourselves? The answer is simple: abandon the delusion of central bank infallibility or independence. Treat their forecasts with a healthy dose of skepticism, always conducting your own due diligence and relying on diverse sources of information. Don’t let pronouncements from Frankfurt, London, or Washington dictate your every move.
Instead, embrace the inherent uncertainty of the economic landscape. Develop agile strategies that can adapt to changing circumstances, diversify your investments, and cultivate a keen awareness of the various factors that might influence your business. Remember, the future is never set in stone, and those who cling to false certainties are most likely to be caught off guard when the tide turns.
In conclusion, let us dispel the myth of central bank infallibility. They are not omniscient oracles, but fallible humans navigating the murky waters of economic complexity. As business leaders, it’s our collective responsibility to break free from the shackles of their pronouncements and forge our own path, informed by critical thinking, sound judgment, and a healthy dose of skepticism. Only then can we truly navigate the unpredictable economic seas with confidence and resilience.
Navigating the Financial Storm: How BTFP Mitigated America’s Banking Crisis and Lessons for Global Business Leaders
As business leaders navigating the ever-changing global landscape, understanding how to manage financial risks has never been more crucial. The recent banking crisis in America serves as a stark reminder of the fragility of our interconnected financial system and the importance of proactive risk management.
In the face of this crisis, the Federal Reserve (Fed) introduced the Bank Term Funding Program (BTFP) as a critical tool to stabilize the banking system. This innovative program provided banks with access to low-cost loans secured by high-quality assets, allowing them to meet their liquidity needs and continue lending to businesses and consumers. This helped to prevent a domino effect of bank failures and maintain the flow of credit throughout the economy.
But beyond the immediate crisis, the BTFP also offers valuable lessons for business leaders worldwide:
1. Diversification of funding sources: The crisis exposed the overreliance of many banks on short-term funding sources, making them vulnerable to market fluctuations. The BTFP encouraged diversification by offering long-term financing options, highlighting the importance of a balanced funding mix for mitigating risk.
2. Liquidity management: The crisis highlighted the need for robust liquidity management strategies. By providing access to emergency funding, the BTFP helped banks weather the storm and protect their ability to meet their obligations. This reinforces the importance of maintaining adequate liquidity reserves to navigate unexpected financial challenges.
3. Importance of high-quality assets: The BTFP relied on banks holding high-quality assets as collateral, demonstrating the crucial role of asset quality in managing risk. Investing in such assets provides a buffer against market volatility and ensures access to funding during times of stress.
4. Proactive communication: The Fed’s clear and timely communication regarding the BTFP helped to calm market anxieties and restore confidence in the financial system. This underpins the importance of transparent communication with stakeholders, especially during periods of uncertainty.
While the BTFP provided a vital safety net during the crisis, it is crucial to note that it was a temporary measure. The long-term stability of the financial system requires addressing underlying vulnerabilities, such as excessive leverage and inadequate regulation.
For business leaders globally, the BTFP serves as a case study in effective risk management. By diversifying their funding sources, maintaining ample liquidity, investing in high-quality assets, and communicating transparently with stakeholders, businesses can increase their resilience and navigate the complexities of the global financial landscape with greater confidence.
Remember, managing financial risks is an ongoing process. By staying informed about new developments, adapting strategies to changing circumstances, and learning from the experiences of others, business leaders can ensure their long-term success in an increasingly volatile world.
How much cash do US, UK and EU fractional reserve banks need to keep to protect against a bank run in percentage terms?
Fractional reserve banking is a system in which banks are required to keep only a fraction of their deposits in reserve, meaning that they can lend out the rest. This system allows banks to create new money in the economy, but it also makes them vulnerable to bank runs, which occur when depositors withdraw their money en masse.
To protect against bank runs, fractional reserve banks need to keep a certain amount of cash in reserve. This percentage is known as the reserve requirement. The reserve requirement is set by the central bank, and it can vary from country to country.
In the United States, the Federal Reserve System (Fed) sets the reserve requirement. As of November 2023, the reserve requirement is 0% for all banks. This means that banks are not required to keep any of their deposits in reserve.
In the United Kingdom, the Bank of England (BoE) sets the reserve requirement. As of November 2023, the reserve requirement is 10% for all banks. This means that banks must keep 10% of their deposits in reserve.
In the European Union, the European Central Bank (ECB) sets the reserve requirement. As of November 2023, the reserve requirement is 1% for all banks. This means that banks must keep 1% of their deposits in reserve.
How much cash do banks need to keep to protect against a bank run?
The amount of cash that banks need to keep to protect against a bank run depends on a number of factors, including the size of the bank, the type of deposits that the bank holds, and the overall level of confidence in the banking system.
In general, larger banks need to keep more cash in reserve than smaller banks. This is because larger banks have more depositors, and therefore they are more vulnerable to a bank run.
Banks that hold more volatile deposits, such as demand deposits (checking accounts), need to keep more cash in reserve than banks that hold less volatile deposits, such as time deposits (savings accounts). This is because demand deposits are more likely to be withdrawn quickly in the event of a bank run.
During times of financial stress, when confidence in the banking system is low, banks may need to keep more cash in reserve. This is because depositors are more likely to withdraw their money during times of financial stress.
How much cash do US, UK and EU banks keep in reserve?
As of November 2023, US banks hold an average of 8.5% of their deposits in reserve. UK banks hold an average of 13.5% of their deposits in reserve. EU banks hold an average of 1.5% of their deposits in reserve.
It is important to note that these are just averages. The amount of cash that individual banks hold in reserve can vary significantly.
How can banks protect themselves from bank runs?
There are a number of things that banks can do to protect themselves from bank runs. One important measure is to maintain a healthy capital position. This means having enough equity and retained earnings to cover losses.
Banks can also protect themselves from bank runs by investing in a diversified portfolio of assets. This helps to reduce the bank’s risk exposure in the event of a downturn in any particular sector of the economy.
Finally, banks can protect themselves from bank runs by maintaining a good reputation. This means being transparent about their financial condition and being responsive to the needs of their customers.
Conclusion
The amount of cash that US, UK and EU fractional banks need to keep to protect against a bank run depends on a number of factors, including the size of the bank, the type of deposits that the bank holds, and the overall level of confidence in the banking system.
In general, larger banks need to keep more cash in reserve than smaller banks. Banks that hold more volatile deposits need to keep more cash in reserve than banks that hold less volatile deposits. During times of financial stress, when confidence in the banking system is low, banks may need to keep more cash in reserve.
As of November 2023, US banks hold an average of 8.5% of their deposits in reserve. UK banks hold an average of 13.5% of their deposits in reserve. EU banks hold an average of 1.5% of their deposits in reserve.
There are a number of things that banks can do to protect themselves from bank runs, including maintaining a healthy capital position, investing in a diversified portfolio of assets, and maintaining a good reputation.
How can the banking industry stop destroying wealth via poor risk management decision-making
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Unrealised Losses on US Regional Banks Due to Commercial Real Estate Loans
The commercial real estate (CRE) in American market is facing a number of challenges in 2023, including rising interest rates, declining occupancy rates, and falling property values. These challenges are putting a strain on regional banks, which have a significant exposure to the CRE market.
As of July 2023, the total amount of CRE loans outstanding at US regional banks is estimated to be $1.5 trillion. This represents about 30% of all CRE loans in the US. The majority of these loans are concentrated in the office and retail sectors, which are both facing headwinds.
The rising interest rate environment is making it more difficult for borrowers to repay their CRE loans. This is because the interest payments on these loans are becoming more expensive. As a result, some borrowers are defaulting on their loans, which is leading to losses for regional banks.
In addition to rising interest rates, the CRE market is also facing declining occupancy rates. This is because many businesses are downsizing their office space or closing their retail locations. As a result, there is a surplus of commercial real estate on the market, which is putting downward pressure on property values.
The combination of rising interest rates, declining occupancy rates, and falling property values is creating a perfect storm for regional banks. These banks are facing a number of challenges, including:
Increased risk of loan defaults
Decreased asset values
Increased funding costs
These challenges are likely to lead to losses for regional banks. As of July 2023, the total amount of unrealised losses on CRE loans at US regional banks is estimated to be $100 billion. This represents about 7% of the total amount of CRE loans outstanding at these banks.
The level of unrealised losses on CRE loans is likely to increase in the coming months. This is because the challenges facing the CRE market are not expected to improve anytime soon. As a result, regional banks are likely to face significant losses in 2023.
How many banks closed during the Great Recession?
During the Great Recession, which lasted from 2007 to 2009, a total of 456 banks failed in the United States. This was the highest number of bank failures since the Great Depression. The majority of these bank failures were caused by losses on commercial real estate loans.
What is the H 8 statistical release?
The H 8 statistical release is a weekly report that provides data on the reserve balances of US banks. This data includes the amount of required reserves, excess reserves, and borrowed reserves held by banks. The H 8 release is published by the Federal Reserve Bank of New York.
Why the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
The development of overnight loan markets has made it more likely that banks will hold fewer excess reserves. This is because banks can now borrow reserves from other banks on an overnight basis if they need to. As a result, banks are less likely to hold excess reserves as a buffer against unexpected withdrawals.
What happens if a deposit outflow of $50 million occurs?
If a deposit outflow of $50 million occurs, a bank will need to either reduce its lending or borrow reserves from other banks. If the bank reduces its lending, it will likely lead to a decrease in economic activity. If the bank borrows reserves from other banks, it will likely have to pay a higher interest rate.
The commercial real estate market is facing a number of challenges in 2023, which is putting a strain on regional banks. These challenges are likely to lead to losses for regional banks in the coming months. The level of unrealised losses on CRE loans is likely to increase in the coming months. As a result, regional banks are likely to face significant losses in 2023.
It seems that it is really hard for many bankers to manage the risks from banking
Approaching two decades after the last financial industry crisis, many of the biggest banks are still destroying shareholder value by failing to manage banking business risks somewhere near the standard expected of them. As a result, we are only a hop skip and a jump from the next financial crisis at any point in time. The problem is that as bankers can’t manage banking risks we cannot have a resilient banking industry that contributes reliably to bank shareholders wealth and income, a strong global economy and a sustainable society.
30 examples of bank fines or penalties imposed by regulators since financial crash 2008 destroying shareholder value:
In 2018, Wells Fargo was fined $1 billion by the Consumer Financial Protection Bureau (CFPB) for abusive lending practices.
In 2014, JPMorgan Chase was fined $2.6 billion by various regulators for their role in the Madoff Ponzi scheme.
In 2015, Citigroup was fined $700 million by various regulators for manipulating the foreign exchange market.
In 2016, Bank of America was fined $415 million by the CFPB for illegal credit card practices.
In 2019, Goldman Sachs was fined $2.9 billion by various regulators for their role in the 1MDB scandal.
In 2018, Barclays was fined $2 billion by various regulators for manipulating the foreign exchange market.
In 2017, Deutsche Bank was fined $630 million by various regulators for money laundering.
In 2019, UBS was fined $5.1 billion by French regulators for tax evasion.
In 2014, BNP Paribas was fined $8.9 billion by various regulators for violating U.S. sanctions.
In 2018, Standard Chartered was fined $1.1 billion by various regulators for violating U.S. sanctions.
In 2016, Societe Generale was fined $1.3 billion by various regulators for violating U.S. sanctions.
In 2017, Credit Suisse was fined $536 million by various regulators for violating U.S. sanctions.
In 2019, Danske Bank was fined $230 million by various regulators for money laundering.
In 2018, Rabobank was fined $369 million by various regulators for money laundering.
In 2015, HSBC was fined $1.9 billion by various regulators for money laundering.
In 2016, Mitsubishi UFJ Financial Group was fined $622 million by various regulators for money laundering.
In 2018, Royal Bank of Scotland was fined $4.9 billion by the U.S. Department of Justice for their role in the financial crisis.
In 2014, Bank of America was fined $16.65 billion by the U.S. Department of Justice for their role in the financial crisis.
In 2016, Wells Fargo was fined $185 million by the CFPB for creating fake accounts.
In 2018, UBS was fined $15 million by the U.S. Securities and Exchange Commission (SEC) for violations related to municipal bond offerings.
In 2017, Citigroup was fined $25 million by the SEC for spoofing.
In 2019, Morgan Stanley was fined $10 million by the SEC for violating regulations related to short selling.
In 2018, JPMorgan Chase was fined $65 million by the SEC for mishandling American Depository Receipts.
In 2016, Deutsche Bank was fined $55 million by the SEC for mishandling pre-release American Depository Receipts.
In 2019, Societe Generale was fined $1.3 billion by various regulators for violating U.S. sanctions.
In 2016, Credit Suisse was fined $90 million by the SEC for misrepresenting the performance metric of a complex product.
In 2017, Goldman Sachs was fined $120 million by the SEC for mishandling “pre-released” American Depository Receipts.
In 2018, Santander was fined $11.8 million by the SEC for improperly handling customer accounts.
In 2019, Western Union was fined $585 million by various regulators for facilitating fraudulent transactions.
In 2020, Commerzbank was fined $47 million by German regulators for failing to implement adequate money-laundering controls.
Has Inflation Been Raised Deliberately by Central Banks to Reduce Debt Levels?
Inflation has been a hot topic of discussion in recent months, as prices have risen at their fastest pace in decades. Some people have raised the question of whether central banks have deliberately raised inflation in order to reduce debt levels.
There is no clear answer to this question, as there is no evidence that central banks have explicitly stated that they are using inflation to reduce debt. However, there are some factors that suggest that this may be a possibility.
First, central banks have been very reluctant to raise interest rates in recent years, even as inflation has been rising. This has led to a situation where real interest rates (interest rates adjusted for inflation) have been negative. Negative real interest rates make it easier for governments to service their debt, as they can borrow money at a lower cost.
Second, central banks have been buying large amounts of government bonds in recent years. This has helped to keep interest rates low and has also increased the amount of money in circulation. This increase in the money supply can lead to inflation, as it can create more demand for goods and services.
Of course, there are other factors that could also be contributing to inflation, such as supply chain disruptions and the war in Ukraine. However, the fact that central banks have been reluctant to raise interest rates and have been buying large amounts of government bonds suggests that they may be willing to tolerate some inflation in order to reduce debt levels.
There are a number of arguments in favour of this view. First, central banks have a mandate to maintain price stability. However, they also have a secondary mandate to promote economic growth. In some cases, it may be necessary to tolerate some inflation in order to achieve economic growth.
Second, inflation can help to reduce the real value of government debt. This is because inflation erodes the purchasing power of the debt, making it easier for the government to repay.
Third, inflation can help to stimulate economic activity. This is because it can lead to higher wages and profits, which can encourage businesses to invest and expand.
Of course, there are also a number of arguments against the view that central banks are deliberately raising inflation to reduce debt levels. First, it is important to note that inflation can have a number of negative consequences, such as increased inequality, lower economic growth, and a decline in the value of savings.
Second, it is not clear that inflation is actually having a significant impact on debt levels. In fact, some studies have shown that inflation can actually increase debt levels in the long run.
Third, it is important to remember that central banks are independent institutions. They are not controlled by governments, and they make their decisions based on what they believe is best for the economy. As such, it is unlikely that central banks would deliberately raise inflation for political reasons.
In conclusion, there is no clear evidence that central banks are deliberately raising inflation to reduce debt levels. However, there are some factors that suggest that this may be a possibility. More research is needed to determine whether or not this is actually the case.
Additional Thoughts
The question of whether central banks are deliberately raising inflation to reduce debt levels is a complex one. There are a number of factors that need to be considered, and there is no easy answer. However, the evidence suggests that it is at least a possibility.
It is important to note that inflation can have a number of negative consequences, so it is not something that should be taken lightly. However, it is also important to remember that central banks have a mandate to maintain price stability. As such, they will need to carefully weigh the risks and benefits of raising inflation before making any decisions.
Only time will tell whether central banks will continue to tolerate high levels of inflation. However, the fact that they have been reluctant to raise interest rates in recent years suggests that they may be willing to tolerate some inflation in order to achieve their other economic goals.
Inflation can be good for reducing debt in some cases, but it is not always a good thing. Here are some of the pros and cons of inflation as a way to reduce debt:
Pros:
Inflation can reduce the real value of debt, making it easier to repay. This is because inflation erodes the purchasing power of money, so the debt becomes worth less in real terms.
Inflation can also lead to higher wages, which can help borrowers to earn more money to repay their debt.
Inflation can stimulate economic growth, which can lead to higher tax revenues for the government. This can help the government to repay its debt.
Cons:
Inflation can also lead to higher prices for goods and services, which can make it harder for borrowers to afford to repay their debt.
Inflation can also lead to uncertainty in the economy, which can make it difficult for businesses to invest and grow. This can lead to lower tax revenues for the government, which can make it harder to repay its debt.
Inflation can also lead to a decline in the value of savings, which can hurt people who are trying to save for retirement or other financial goals.
Overall, inflation can be a double-edged sword when it comes to reducing debt. It can help to reduce the real value of debt, but it can also lead to higher prices and uncertainty in the economy. Whether or not inflation is a good thing for reducing debt depends on a number of factors, including the level of inflation, the state of the economy, and the type of debt.
It is important to note that inflation is not a sustainable way to reduce debt. In the long run, inflation will erode the value of the currency, making it more difficult to repay debt. Additionally, inflation can lead to other negative consequences, such as increased inequality and lower economic growth.
If you are considering using inflation to reduce your debt, it is important to weigh the risks and benefits carefully. You should also talk to a financial advisor to get personalised advice.
Who is benefiting from inflation?
Inflation can benefit a variety of people, depending on the specific circumstances. Here are some of the groups that may benefit from inflation:
Borrowers with fixed-rate debt. When inflation rises, the value of money decreases. This means that borrowers with fixed-rate debt, such as mortgages or car loans, can repay their debts with money that is worth less than when they borrowed it. This can make it easier for them to afford their monthly payments.
People with assets that appreciate in value with inflation. Assets such as real estate, commodities, and stocks can often appreciate in value during periods of inflation. This means that people who own these assets can benefit from the rising prices.
Businesses that can pass on higher costs to consumers. Businesses that sell goods or services that are inelastic, meaning that consumers are not very sensitive to price changes, can benefit from inflation. This is because they can raise their prices without losing too many customers.
Governments that have a lot of debt. Inflation can reduce the real value of government debt. This is because inflation erodes the purchasing power of money, so the debt becomes worth less in real terms. This can make it easier for governments to repay their debt.
It is important to note that inflation can also have negative consequences for some people. For example, inflation can hurt people who have fixed incomes, such as retirees, because their incomes do not rise as quickly as prices. Inflation can also hurt people who save money, because the value of their savings decreases as prices rise.
Overall, the impact of inflation on different groups of people depends on a variety of factors, including the level of inflation, the type of assets people own, and their income and spending patterns.
Did central banks cause inflation?
Central banks are often blamed for causing inflation, but the reality is that there are a number of factors that can contribute to inflation. These include:
Increased demand for goods and services. When demand for goods and services increases, prices can rise. This can happen if there is a sudden increase in population, or if there is a surge in economic activity.
Supply shocks. A supply shock is an event that disrupts the supply of goods and services, leading to higher prices. This can happen due to natural disasters, wars, or political events.
Deregulation. Deregulation can lead to increased competition, which can drive down prices. However, it can also lead to lower wages and increased profits for businesses, which can lead to inflation.
Monetary policy. Central banks can influence inflation by changing the money supply. If the money supply grows too quickly, it can lead to inflation. However, if the money supply grows too slowly, it can lead to deflation.
So, did central banks cause inflation? It is possible that they played a role, but it is also likely that other factors were also involved. The truth is that inflation is a complex issue with no easy answers.
In recent years, central banks have been criticized for their loose monetary policies, which have been blamed for contributing to inflation. However, it is important to note that central banks have a mandate to maintain price stability, and they are often faced with difficult choices when it comes to monetary policy.
For example, during the COVID-19 pandemic, central banks around the world took steps to stimulate the economy by lowering interest rates and increasing the money supply. This helped to prevent a deeper recession, but it also led to higher inflation.
Now that the economy is recovering, central banks are starting to tighten monetary policy in an effort to bring inflation under control. However, it is unclear how successful they will be. The global economy is still facing a number of challenges, including the war in Ukraine, and it is possible that inflation will remain elevated for some time.
Only time will tell whether central banks will be able to bring inflation under control. However, it is clear that they are playing a key role in trying to manage this complex issue.
Why do central banks want inflation?
Central banks do not want inflation. In fact, their primary goal is to maintain price stability, which means keeping inflation low and stable. However, there are some situations where central banks may tolerate a small amount of inflation.
One reason why central banks may tolerate inflation is to stimulate economic growth. When inflation is low, businesses may be reluctant to invest and hire new workers. This is because they are worried that their profits will be eroded by inflation. However, if inflation is slightly higher, businesses may be more willing to invest, as they know that their profits will keep up with rising prices.
Another reason why central banks may tolerate inflation is to reduce unemployment. When inflation is low, wages may not rise as quickly as prices. This can lead to a situation where workers are earning less than they need to keep up with the cost of living. However, if inflation is slightly higher, wages may rise faster, which can help to reduce unemployment.
Of course, there are also risks associated with inflation. If inflation gets too high, it can lead to deflation, which is a decrease in the general price level. Deflation can be very harmful to the economy, as it can lead to businesses going bankrupt and people losing their jobs.
For these reasons, central banks generally try to keep inflation low and stable. However, there may be some situations where they may tolerate a small amount of inflation in order to achieve other economic goals.
Here are some of the risks of inflation:
Deflation: Deflation is a decrease in the general price level. This can lead to businesses going bankrupt and people losing their jobs.
Reduced economic growth:Inflation can make it difficult for businesses to plan for the future, as they are not sure how much their costs will rise. This can lead to reduced investment and economic growth.
Unfair distribution of wealth:Inflation can benefit some people and harm others. For example, borrowers with fixed-rate debt may benefit from inflation, as their debts become worth less in real terms. However, savers may be harmed by inflation, as the value of their savings decreases.
Overall, inflation is a complex issue with both risks and benefits. Central banks need to carefully weigh these factors when making decisions about monetary policy.
Is the Traditional Financial Marketplace More Dangerous Than Crypto?
Why crypto is better than traditional finance
The traditional financial marketplace is a complex and often risky place. Investors are constantly bombarded with information about different investment options, and it can be difficult to know which ones are the safest. In recent years, cryptocurrency has emerged as a new and potentially more dangerous alternative to traditional finance.
Which is More Risky: Stock Market or Cryptocurrency?
The stock market and cryptocurrency are both risky investments, but they pose different types of risks. The stock market is a volatile place, and stock prices can fluctuate wildly. This can make it difficult to make money in the stock market, and it can also lead to significant losses. Cryptocurrency is even more volatile than the stock market, and its prices can fluctuate even more wildly. This makes cryptocurrency an even riskier investment than the stock market.
Why Crypto Is Better Than Traditional Finance
There are several reasons why crypto is better than traditional finance. First, crypto is decentralised, which means that it is not controlled by any central authority. This makes it more secure and resistant to fraud. Second, crypto is transparent, which means that all transactions are recorded on a public blockchain. This makes it easier to track and audit transactions. Third, crypto is borderless, which means that it can be used to send and receive payments anywhere in the world. This makes it a more convenient and efficient way to transfer money.
Is Crypto Safer Than Real Money?
Crypto is not necessarily safer than real money. In fact, it can be even riskier. Cryptocurrencies are often targeted by hackers, and there have been several high-profile cases of cryptocurrency theft. Additionally, the value of cryptocurrencies can fluctuate wildly, which can lead to significant losses.
Is Crypto Safer Than Banks?
Cryptocurrencies are not necessarily safer than banks. In fact, they can be even riskier. Banks are regulated by governments, which means that they are subject to certain safeguards. Additionally, banks are insured by the FDIC, which means that your money is protected up to $250,000. Cryptocurrencies are not regulated by governments, and they are not insured by any government agency. This means that if you lose your cryptocurrency, you are unlikely to get it back.
The traditional financial marketplace and the crypto market are both risky places. However, the crypto market is an even riskier place. If you are considering investing in cryptocurrency, you should do your research and understand the risks you are taking.
The Problem of U.S. Banks, FDIC and the Fed Loans
“The strength of the United States economy lies in the resilience and innovation of its banking system, which serves as the lifeblood of economic growth and stability”
Janet Yellen
Banks are important to the economy. They help people save money, borrow money, and make payments. But banks can also get into trouble. If a bank fails, it can hurt people and businesses who have money in the bank, and it can also hurt the economy.
The Federal Deposit Insurance Corporation (FDIC) is a government agency that helps to protect people’s money in banks. The FDIC insures all bank deposits up to $250,000. This means that if a bank fails, the FDIC will pay back people up to $250,000 for their deposits.
The Federal Reserve is another government agency that helps to regulate banks. The Federal Reserve can lend money to banks that are in trouble. This helps to keep banks from failing and helps to protect the economy.
But even with the FDIC and the Federal Reserve, banks can still get into trouble. This is because banks make loans to people and businesses. If people and businesses don’t pay back their loans, the banks can lose money. And if a bank loses too much money, it can fail.
The unprecedented printing of money out of thin air by the Fed and U.S. government policy has meant demand for products and services increased whilst supply has been restricted causing prices to rise pushing up inflation that devalues the dollar. Increasing interest rates – by the Fed and thereby the banks – to reduce inflation has caused bank assets like bonds to fall in value and means banks do not have enough assets to cover their liabilities. These “hidden losses” eventually become “real” and makes banking model to fail – or in other words make banks fail. Banks failing causes a bank run where more and more banks fail threatening the whole financial sector.
To save the financial sector and prevent economic depression lasting decades, the Federal Reserve has been lending billions of dollars every week to hundreds of banks in America to help them stay afloat.
Banks store money for people and businesses.
The FDIC is like a government insurance company that protects people’s and businesses money in banks.
The Federal Reserve is a private entity or central bank that lends money to other banks.
If a bank fails, it means that it can’t pay back the money that people have deposited in it. A bank deposit is a loan from the depositor – consumer or business – that effectively loans money to the bank.
If a lot of banks fail, it will hurt the economy for decades.
Banks are keeping hold of the cash they do have to try to shore-up their balance sheet’s. This means it is harder to borrow money to buy stuff. Fewer purchases means businesses make less money and the government has less money in tax income. More people lose their jobs as businesses close and the public sector cut budgets.
People are advocating that the FDIC/The Fed take on the the financial burden from the banks so the banks can stay in business and the economy avoids depression.
Here are some possible outcomes of the current situation:
People and businesses spend more. This would help banks to stay afloat and prevent them from failing.
People and businesses spend less and less due in large part to a credit crunch where access to borrowed money to spend drys up. The money supply eventually drys up. The current banking crisis spirals down – less and less money on deposit from consumers and businesses. This could lead to more bank failures, which would hurt people and destroy the economy.
The government, The Fed and FDIC could step in and provide more support to banks in form of a bail out that is not called a bail out but is one. The government sorts out debt-ceiling, the Fed slashes interest rates and this in turn reduces impact on bonds held by banks to reduce unbalanced balance sheets and the FDIC cobbles together a bank bail-out in all but name. This could help to prevent bank failures and protect people’s money.
It is too early to say what will happen. The situation is fluid and constantly changing. But it is important to be aware of the risks and to take steps to protect yourself.
Article by Keith Lewis 19th May 2023
Pros and Cons Of Programmable CBDCs
The programmable money concept, also known as central bank digital currency (CBDC), is a digital form of cash that is issued by a country’s central bank. It is similar to traditional cash in that it can be used to make payments, but it is different in that it is stored electronically and can be programmed to have certain restrictions.
There are a number of potential pros and cons to CBDC programmable money.
Some of the potential pros include:
It could make it easier for people to make payments, especially if they do not have access to traditional banking services.
It could help to reduce fraud and other financial crimes.
It could make it easier for businesses to manage their finances.
It could help to promote financial inclusion by making it easier for people to access financial services.
Some of the potential cons include:
It could give the government more control over people’s finances.
It could lead to a decrease in privacy, as the government would have access to people’s financial transactions.
It could make it easier for the government to collect taxes.
It could lead to a decrease in competition in the financial sector, as banks would have to compete with the central bank for customers.
Overall, the decision of whether or not to issue CBDC programmable money is a complex one that will require careful consideration of the potential pros and cons.
Fears Of Global Banking Contagion Risks
Banking contagion is a phenomenon in which the failure of one bank triggers a domino effect that spreads throughout the banking system, leading to widespread panic and financial instability. The term “contagion” is derived from the concept of a disease spreading rapidly from one person to another, and it is used in the context of banking to describe the rapid spread of financial distress from one institution to others.
The causes of banking contagion are complex and multifaceted. One factor that can contribute to contagion is the interconnectedness of the banking system. Banks are linked to one another through a variety of financial instruments, including loans, deposits, and securities. When one bank fails, it can cause other banks to suffer losses as well, particularly if they have large exposures to the failed bank.
Another factor that can contribute to contagion is the loss of confidence in the banking system. When depositors and investors lose faith in the ability of banks to honor their obligations, they may rush to withdraw their funds, creating a liquidity crisis that can quickly spread throughout the system.
The consequences of banking contagion can be severe. In extreme cases, it can lead to a complete collapse of the banking system, as occurred during the global financial crisis of 2008-09. Even in less severe cases, contagion can lead to significant economic damage, as banks are forced to sell assets to raise cash, leading to a downward spiral in asset prices and a contraction in credit availability.
To prevent banking contagion, regulators and policymakers have implemented a range of measures aimed at increasing the resilience of the banking system. One such measure is the imposition of capital requirements, which require banks to hold a certain amount of capital as a buffer against losses. By increasing the amount of capital that banks are required to hold, regulators can reduce the likelihood of contagion spreading from one institution to others.
Another measure that can be used to prevent contagion is the provision of lender of last resort (LOLR) facilities by central banks. LOLR facilities allow banks to borrow from the central bank in times of financial distress, providing them with a source of liquidity that can help to prevent a liquidity crisis from spreading throughout the system.
In addition to these measures, regulators and policymakers have also sought to increase transparency and improve risk management practices within the banking system. By requiring banks to disclose more information about their activities and by encouraging them to adopt more robust risk management practices, regulators can reduce the likelihood of contagion occurring and limit the damage that it can cause.
Banking contagion is a serious risk that can have severe consequences for the banking system and the wider economy. To prevent contagion, regulators and policymakers must work to increase the resilience of the banking system, provide LOLR facilities, and improve transparency and risk management practices. By taking these steps, they can help to prevent a crisis from spreading and limit the damage that it can cause.
Lessons From The Last Depression
Banks using depositors money in 1929 to invest in stock market caused banks to call in their loans to businesses which resulted in lack of money in economy causing mass in employment and Great Depression of 1930s
The Great Depression, which began in 1929 and lasted for over a decade, was one of the most significant economic crises of the 20th century. Many factors contributed to the severity of the Depression, but one major factor was the way banks were using depositors’ money to invest in the stock market.
In the 1920s, the stock market was booming, and many Americans were eager to invest in the market. However, most Americans did not have the money to invest directly in stocks. Instead, they deposited their money in banks, which then used the deposits to invest in the stock market on behalf of their customers.
This practice, known as “speculative investment,” was profitable for banks and their customers as long as the stock market continued to rise. However, in 1929, the stock market crashed, and the value of many stocks plummeted. Banks and their customers who had invested heavily in the stock market suffered significant losses.
As banks realised the extent of their losses, they became hesitant to lend money to businesses, fearing that they would not be repaid. This lack of lending meant that many businesses could not borrow the money they needed to operate, leading to a slowdown in economic activity.
To make matters worse, banks began calling in their loans to businesses that had already borrowed money, hoping to recoup some of their losses. As businesses were unable to repay their loans, many were forced to shut down, leading to widespread unemployment.
It’s the squeeze on banking sector’s ability to lend to businesses and consumers that will kill inflation not increasing interest rates. Banks fighting to survive are not gonna lend more. They will pull in their horns and try to get money from anywhere they can. The squeeze on lending will suck money out of the economy and businesses will fail. Failing businesses will boost unemployment. Increased unemployment will lead to reduced consumer spending. Reduced consumer spending will induce more business failures. A 2023 cyclical depression loop is only just getting started!
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The lack of money in the economy also led to a decrease in consumer spending, further exacerbating the economic downturn. As more and more people lost their jobs and businesses closed their doors, the Great Depression deepened, and the effects were felt around the world.
In response to the crisis, the U.S. government implemented a number of policies designed to stabilise the economy and prevent a similar crisis from occurring in the future. The most significant of these policies was the creation of the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits up to a certain amount and gave depositors more confidence in the safety of their money.
The Great Depression was a devastating economic crisis that had far-reaching effects on the United States and the world. While many factors contributed to their the severity of the Depression, the practice of banks using depositors’ money to invest in the stock market played a significant role in the economic collapse. The lessons learned from this crisis continue to inform economic policy and financial regulation to this day.
The Federal Deposit Insurance Corporation (FDIC) is vastly underfunded. If your insurance does not have enough funds to payout when it needs to what will you do?
Define economic depression: An economic depression is a severe and prolonged downturn in economic activity that typically lasts for several years and is characterised by a significant decline in economic output, high unemployment, and widespread poverty. Depressions are more severe than recessions, which are also periods of economic decline, but typically last for a shorter period of time and are less severe. Depressions are often accompanied by financial crises, deflation, and a contraction in credit, leading to a decline in consumer spending and business investment. They are generally caused by a combination of factors, including structural imbalances in the economy, financial market instability, and policy mistakes by governments and central banks.
Great Depression 2023
Not everything is the same as 1929 (eg there is some better protection now but is the protection fully funded and if not what happens then) that led to a decade long depression but there are some questions that need to be asked
Are there structural imbalances in the economy?
Is there growing financial instability?
Have governments and central banks made huge policy mistakes?
Consequences of Overprinting Money
Overprinting money and expanding the money supply, measured by M2, can lead to various consequences, some of which are negative. Here are some of the potential impacts:
Inflation: One of the most significant consequences of overprinting money and expanding the money supply is inflation. When there is too much money in circulation, the demand for goods and services increases, leading to higher prices. This can erode the purchasing power of the currency, causing inflation. Inflation can lead to a decrease in the value of money and an increase in the cost of living.
Currency devaluation: Overprinting money can also lead to currency devaluation, where the value of the currency drops relative to other currencies. This can make imports more expensive and decrease the purchasing power of the country’s currency. A weaker currency can also make it more expensive for the country to borrow money from other countries.
Speculative bubbles: When there is too much money in circulation, it can lead to speculative bubbles in asset prices, such as stocks, real estate, and commodities. This can lead to price distortions and create a false sense of prosperity. Eventually, these bubbles can burst, leading to economic downturns, job losses, and financial instability.
Capital misallocation: Overprinting money can lead to a misallocation of capital, where resources are directed towards unproductive or inefficient investments. This can lead to a decrease in economic growth and productivity over the long term, as the resources are not being used effectively.
Interest rates: Overprinting money can also lead to low-interest rates, as there is more money available for lending. Low-interest rates can encourage borrowing, but they can also discourage saving, leading to a decrease in investment and economic growth over time.
Debt: Overprinting money can lead to an increase in national debt, as the government borrows more money to finance its spending. This can lead to higher interest payments, which can crowd out other government spending and lead to a debt crisis.
Overprinting money and expanding the money supply can have significant consequences on the economy. While it can provide short-term benefits, such as increased spending and economic growth, the long-term consequences can be severe, including inflation, currency devaluation, speculative bubbles, capital misallocation, low-interest rates, and increased debt. Policymakers must balance the benefits of printing money with the potential risks to ensure economic stability and growth.
The best way to destroy the capitalist system is to destroy the currency
Lenin
One would assume that the destruction of financial system is not a deliberate one? However, we’ve printed more fake money in the last 3 years than we have printed in all the previous years combined. Did we do this cause we didn’t know what damage it would do or because we did?
Money Creation and Banking
Money Creation and Banking
Bank Bail-ins Explained
Bank bail-ins are a form of resolving financial crises in banks where depositors, creditors, and shareholders are required to bear losses instead of taxpayers or the government. It is a tool used by regulators to prevent taxpayers’ funds from being used to bail out failing banks and to ensure that the losses are absorbed by those who are responsible for the bank’s failure.
The concept of bank bail-ins was introduced after the 2008 global financial crisis, where several governments around the world bailed out their respective banks with public funds. This practice was seen as unfair as the taxpayers had to bear the costs of the bank’s failures. To prevent this, regulators developed the concept of bail-ins, which requires the bank’s stakeholders to bear the losses.
In a bail-in scenario, the bank’s liabilities are converted into equity or written off, reducing the amount of debt the bank owes to its creditors. Depositors may also be required to bear losses by having their deposits converted into shares in the bank or by having their deposit balances reduced. Shareholders, on the other hand, are likely to see their investments in the bank become worthless.
One of the key advantages of bank bail-ins is that they provide a faster and more effective solution to bank failures. Unlike government bailouts, which can take time to negotiate and implement, bail-ins can be done quickly, reducing the impact of the bank failure on the economy and preventing the spread of financial contagion.
However, bank bail-ins also have some disadvantages. They can cause widespread panic and result in a loss of confidence in the banking system, leading to runs on banks. Furthermore, bail-ins can also result in losses for depositors, which may negatively impact the economy.
In conclusion, bank bail-ins are a useful tool for resolving financial crises in banks. They help to ensure that the losses are absorbed by those responsible for the bank’s failure, reducing the impact on taxpayers and the government. However, they also have some disadvantages and must be used with caution to prevent widespread panic and loss of confidence in the banking system.
Example of actual banking bail-in
The Cyprus banking bail-in in 2013 is often cited as an example of the implementation of a bank bail-in. The bail-in was necessary to resolve the financial crisis in Cyprus, which was caused by the exposure of its banks to the sovereign debt crisis in Greece.
Under the bail-in, depositors with more than 100,000 euros in their accounts were required to bear losses, resulting in the conversion of a portion of their deposits into equity in the banks. The bail-in was seen as a necessary step to resolve the financial crisis, but it also had negative consequences for depositors, who lost a portion of their savings.
The Cyprus banking bail-in created widespread panic and resulted in a loss of confidence in the banking system, leading to runs on banks. It also had a negative impact on the economy, as depositors were less willing to invest in the country. Despite these challenges, the bail-in was seen as a success in terms of resolving the financial crisis and restoring stability to the banking system.
In conclusion, the Cyprus banking bail-in serves as a cautionary tale for the use of bank bail-ins. While it was necessary to resolve the financial crisis, it also resulted in losses for depositors and had a negative impact on the economy. The case highlights the importance of considering the potential consequences of a bank bail-in before implementing it.
Is bank bail-in realistically possible in UK and USA
In the United Kingdom and the United States, bank bail-ins are not typically considered as a possible solution for resolving financial crises in banks due to several reasons.
In the UK, the government has traditionally used taxpayers’ funds to bail out failing banks, rather than resorting to bank bail-ins. This is due to the strong deposit insurance scheme in place, which ensures that depositors’ funds are protected up to a certain limit (£85000). The deposit insurance scheme is seen as a crucial tool for maintaining public confidence in the banking system and preventing runs on banks.
In the United States, the regulatory framework for resolving failed banks is primarily based on the Federal Deposit Insurance Corporation (FDIC) and its orderly liquidation authority (OLA). The FDIC and the OLA provide a framework for resolving failed banks without resorting to bank bail-ins. Instead, the losses are absorbed by the failed bank’s creditors and shareholders, with depositors’ funds protected by the deposit insurance scheme.
The Federal Deposit Insurance Corporation (FDIC) is a self-funded insurance corporation that operates from the premiums it collects from banks. The FDIC’s mission is to maintain stability and public confidence in the US banking system by insuring depositors’ funds up to $250,000 per depositor, per insured bank.
The FDIC’s insurance fund, known as the Deposit Insurance Fund (DIF), is used to pay insurance claims in the event of a bank failure. The DIF is maintained at a level that is sufficient to meet projected insured deposits, taking into account estimated losses from bank failures.
If the FDIC was to be underfunded, under-insured, this could create problems should a bank or banks fail.
BusinessRiskTV
The laws on how much money American banks need to hold has been reduced to zero from 10 percent so in theory banks do not hold any cash for any depositors who ask for it. Under fractional reserve banking the banks don’t need to hold any of your cash.
Banks get into problems if they lend money badly or there is a run on the banks where people rush to get their cash out. A deteriorating economy could mean good lending becomes bad lending.
To suggest a banking bail-in is impossible is clearly wrong. Although unlikely, it is not impossible. The phrase “as safe is money in the bank” no longer holds true. This has become increasingly true since the mismanagement of printing money for pandemic risk management.
There is one thing that is certain – inflation, from over-printing of money by central banks and excessive government spending, is robbing the value of your money in the bank. The way to reduce inflation is to increase interest rates. Increasing interest rates is designed to create lower employment and lower consumer spending which comes in part from businesses failing. Businesses failing results in bad debts for banks. Rising unemployment will create more bad debts for banks.
Let’s hope the cure for inflation is not worse than inflation robbing your money in the bank. Your bank robbing your money would be far worse!
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17 June 2023 – The Central Bank Dilemma
Central banks are facing a difficult dilemma. On the one hand, they need to take action to control inflation, which is at a 40-year high in many countries. On the other hand, they need to be careful not to take too aggressive action, which could lead to a financial crisis.
The problem is that there is no easy way to balance these two goals. If central banks raise interest rates too much, it could lead to a recession. This would reduce demand for goods and services, which would help to bring down inflation. However, it would also lead to job losses and economic hardship.
On the other hand, if central banks do not raise interest rates enough, inflation could spiral out of control. This would make it more difficult for people to afford basic necessities, and it could lead to social unrest.
So, what is the best way for central banks to proceed? There is no easy answer, but there are a few things that they can do to try to mitigate the risks.
First, they need to communicate clearly with the public about their plans. This will help to reduce uncertainty and make it more likely that people will accept the need for higher interest rates.
Second, they need to be flexible in their approach. If inflation starts to come down, they may be able to ease off on interest rates without causing a recession.
Third, they need to work with other countries to coordinate their monetary policies. This will help to ensure that they do not all raise interest rates at the same time, which could lead to a global recession.
The central bank dilemma is a difficult one, but it is one that must be addressed. If central banks do not take action to control inflation, it could have serious consequences for the global economy.
The Trade-Off Between Monetary Stability and Financial Stability
In addition to the dilemma of balancing inflation and economic growth, central banks also face a trade-off between monetary stability and financial stability. Monetary stability refers to the ability of a central bank to maintain a stable level of prices. Financial stability refers to the ability of the financial system to withstand shocks and avoid crises.
When central banks raise interest rates, it can help to reduce inflation. However, it can also lead to financial instability. This is because higher interest rates can make it more difficult for businesses to borrow money, which can lead to defaults and bankruptcies. It can also make it more difficult for households to afford their mortgages, which can lead to foreclosures.
The trade-off between monetary stability and financial stability is a complex one. There is no easy way to balance these two goals. However, central banks need to be aware of the trade-off and try to find ways to minimize the risks.
The Impact of the Global Financial Crisis
The global financial crisis of 2008-2009 highlighted the importance of financial stability. The crisis was caused by a number of factors, including excessive risk-taking by banks and other financial institutions. As a result of the crisis, many banks were bailed out by governments, and the global economy went into a deep recession.
The global financial crisis has made central banks more aware of the importance of financial stability. As a result, they have taken steps to strengthen the financial system. These steps include increasing capital requirements for banks, improving regulation of the financial system, and creating new financial stability frameworks.
The Future of Central Banking
The future of central banking is uncertain. The global economy is facing a number of challenges, including high levels of debt, rising inequality, and climate change. These challenges will put pressure on central banks to find new ways to maintain monetary stability and financial stability.
One of the challenges facing central banks is the rise of digital currencies. Digital currencies, such as Bitcoin, are not subject to the same regulations as traditional currencies. This could pose a risk to financial stability if digital currencies become widely adopted.
Another challenge facing central banks is the climate crisis. The climate crisis is likely to have a significant impact on the global economy. Central banks will need to find ways to manage the economic risks posed by the climate crisis.
The future of central banking is uncertain, but it is clear that central banks will play an important role in managing the global economy in the years to come.
Central banks are facing a number of challenges in the years to come. They will need to find ways to balance the goals of monetary stability and financial stability, while also managing the risks posed by the global financial crisis, the rise of digital currencies, and the climate crisis. The future of central banking is uncertain, but it is clear that central banks will play an important role in managing the global economy in the years to come.
18 May 2023 – USA banks still borrowing billions from the Fed to stay in business and the amount needed by banks is rising.
The amount of money U.S. banks borrowed from the Federal Reserve rose for the second week in a row. Total bank borrowing rose to $96.1 billion in the 7 days ending 17th May 2023 from $92.4 billion in the week before.
Several U.S. regional banks have been taken over by larger banks or sold off in bits as the fall out from some of the biggest bank failures ever in recent months has not yet been fully resolved. It will take well into 2024 before we will know if the U.S. banking and financial system has been saved.
After Silicon Valley Bank SVB failed, the Fed created an emergency lending programme to try to prevent the whole U.S. banking system collapsing. If more banks failed the dominoes falling would have – and might still – cause systemic banking failure and decades long economic depression. The consolidation of the U.S. banking system will progress throughout 2023 and 2024 to try to stabilise the U.S. financial system.
3 May 2023 – FDIC, following US bank failures, has no money left to cover depositors money currently in U.S. banks
The failure of four banks in America recently means that the inadequate amount of money the FDIC did have to cover depositors money has been wiped out. How can the FDIC guarantee all the deposits in US banks with no money?
2 May 2023 – Best and worst case scenario if corporate loan market and bank bond hidden liabilities in America risks materialise
The corporate loan market and bank bond hidden liabilities in America are a major risk to the financial system. If these risks materialise, it could lead to a financial crisis.
The best case scenario is that these risks do not materialise. The economy continues to grow, and companies are able to repay their loans. Banks are able to maintain their capital levels, and the financial system remains stable.
The worst case scenario is that these risks materialise. The economy enters a recession, and companies default on their loans. Banks are forced to write down losses, and their capital levels are depleted. This could lead to a financial crisis, as banks are unable to lend money to businesses and consumers.
Here are some of the potential consequences of the corporate loan market and bank bond hidden liabilities materialising:
A recession: If companies default on their loans, it could lead to a recession. This is because companies would have less money to invest and hire, which would lead to a decline in economic activity.
A financial crisis: If banks are forced to write down losses, it could lead to a financial crisis. This is because banks would have less money to lend, which would make it difficult for businesses and consumers to borrow money. This could lead to a decline in investment and spending, which would further weaken the economy.
A loss of confidence in the financial system: If a financial crisis were to occur, it could lead to a loss of confidence in the financial system. This could make it difficult for businesses and consumers to get loans, which would further weaken the economy.
The corporate loan market and bank bond hidden liabilities are a major risk to the financial system. If these risks materialise, it could lead to a financial crisis. It is important to take steps to mitigate these risks, such as increasing capital requirements for banks and improving regulation and governance of the financial system.
26 April 2023 – Reuters news agency had reported that the Swiss financial regulator FINMA has labelled the recovery and resolution plans of two of Switzerland’s five systematically important banks as insufficient.
FINMA questioned the ability of Zuercher Kantonalbank (ZKB) and PostFinance to continue functioning in case they experienced a crisis. It said “ZKB has not yet built up the required capital in full” and that “PostFinance must realign its emergency planning.”
The assessment released by FINMA gauged the emergency plans of Switzerland’s main banks as they stood at the end of 2022. It does not therefore take into account Credit Suisse’s merger with UBS.
The financial regulator had positively viewed the crisis plan Credit Suisse had developed last year, saying the bank, which last month had to be rescued by UBS in a takeover engineered by Swiss authorities, had an emergency plan that was ready to be implemented.
“It is clear that there are important lessons to be learned from the Credit Suisse crisis for future crisis preparations,” FINMA’S Chief Executive Urban Angehrn said.
In the wake of Credit Suisse’s takeover, the regulator deflected blame for the debacle at the country’s second-biggest bank, saying it had been quick to respond, calling instead for more powers to take lenders to task.
9 April 2023 – Swiss Finance Minister Karin Keller-Sutter said Switzerland’s economy would probably have collapsed had Credit Suisse gone bankrupt, in an interview published Sunday.
Keller-Sutter told Le Temps newspaper that the government had acted in the country’s best interests in swiftly arranging the takeover of Switzerland’s second-biggest bank by its larger domestic rival UBS.
25 March 2023 – As the biggest economy in the world fights to keep its banking sector afloat, the world’s second biggest economy plans to take firm control of the whole banking, insurance and financial sector in China.
USA government and The Fed are scrambling from one crisis to the next. As banks struggle to survive unrealised losses from bond market, regional banks now struggle with unrealised losses from commercial real estate loans.
Meanwhile the communist party in China plans to take an iron grip on its own property and financial issues, domestic and international. Its new Central Financial Committee is China’s new tool to take full control of the financial sector. Nearly 60 trillion dollars of financial assets in China will now be controlled by Chinese Communist Party CCP leader, President of the Peoples Republic of China, Xi Jinping.
24 March 2023 – The Fed is kicking the banking crisis into 2024
The USA based banking crisis has not been solved. It has just been delayed. Only the lender of last resort in America is keeping the American banking system afloat. However the day of reckoning for American banks will come when the money borrowed from the Fed has to be paid back by the failed banks. Set your banking alarm for early 2024!
22 March 2023 – One of the largest investors of the Credit Suisse bonds that were wiped out in the UBS takeover of the troubled Swiss bank still believes in the value of the debt class and the “bail-in” system designed to save banks seen as too big to fail.
“Anybody that bought CoCos who didn’t think ‘bailed-in’ had their head in the sand. Nobody likes it when it happens, but that’s the whole idea behind CoCos,” Philip Jacoby, chief investment officer at Spectrum, told Reuters.
Spectrum Asset Management Inc on Monday said it liquidated all its Credit Suisse positions during late market trading on Saturday before the contingent convertible debt, called CoCos among traders, were written down to zero in the UBS deal.
Bail-ins were included in the Dodd-Frank Act to protect U.S. taxpayers after the collapse of Lehman Brothers in 2008 so that they would not bear the cost of a bailout. Now banks in difficulty will be bailed in by the holders of CoCos, formerly known as Additional Tier 1 bonds (AT1).
In 2021 and early 2022 Spectrum held about $400 million of Credit Suisse AT1 bonds, Jacoby said. The Credit Suisse debt represents about 12% of the benchmark for CoCos, a massive slice of the ICE BofA U.S. dollar contingent capital index, he said.
Spectrum is enthusiastic about CoCos as they offer “uncommon value” for the market, said Matthew Byer, the firm’s chief operating officer. “This is a Credit Suisse event and this is a Swiss bank regulation event, this is not a global disaster for CoCos.”
20 March 2023 – Relief that Credit Suisse been saved quickly turns to who is next!
UBS Group takeover of Credit Suisse is backed by Swiss government. Switzerland is pledging more than 160 billion francs ($173 billion) in loans and guarantees to underpin the new group.
Following the 2008 financial crash, politicians pledged to never bail out banks again. The Credit Suisse rescue, orchestrated with public money, shows banks’ continued vulnerability and how their problems can quickly rebound on their home country.
Reuters news agency
Holders of Credit Suisse’s Additional Tier 1 bonds will lose all their money under the deal though this may be challenged in courts.
20 March 2023 – Inflation to continue to run riot as central banks in USA, UK and ECB can’t increase interest rates much more other than token gesture if at all and instead pump even more fake money into the global economy.
Central banks pivoting from Quantitative Tightening QT to Quantitative Easing QE – again! Collapsing confidence in the stability of the financial system resulted in more fake money printed out of thin air being made available daily to banks struggling to remain viable. The end result is no more QT.
At least two major banks in Europe are examining scenarios of contagion possibly spreading in the region’s banking sector and looking to the Fed and the European Central Bank to step in with stronger signals of support, two senior executives with knowledge of the deliberations told Reuters news agency.
Reuters News Agency
The coordinated action by key central banks to keep weak banks in business is on par with action taken in last financial crisis in 2008 to protect the financial system.
The Fed and Bank of England are due to hold meetings on interest-rate policy this week, when they will have to strike a difficult balance between their fight against inflation and worries about financial turmoil.
18 March 2023 – In America this week, big U.S. banks had to give a $30 billion lifeline for smaller lender First Republic, while U.S. banks altogether sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days.
That surpassed a previous high set during the most acute phase of the financial crisis in 2008.
American politicians changed the rules for fractional reserve banking. Banks used to have to keep 10% deposited and lend 90%. Now it’s 0% and lend 100%. Banks in America potentially have zero cash!
BusinessRiskTV
Biden this week called on Congress to give regulators greater power over the banking sector, including leveraging higher fines, clawing back funds and barring officials from failed banks, a White House statement said. For claw back read bank shareholders losing assets seized by U.S. government effectively. The takeover of USA banking system by Federal authorities.
18 March 2023 – The central bank on Friday reduced the amount of cash banks must hold as reserves to try to protect Chinese banking system from running out of money.
Chinese domestic banking industry’s debt repayment costs continue to worry and the net interest margin is continuing to narrow to historical lows. The Chinese central bank has lowered the cash reserve requirement ratio Chinese banks must retain as safety net. In other words Chinese banks are less safe now. Or to put it another way, your cash in Chinese banks is less safe now!
18 March 2033 – Was money from Swiss central bank just to give it time to be taken over?
It is rumoured that UBS bank will takeover Credit Suisse to try to stem the systemic collapse of the domestic and global banking system.
16 March 2023 – Euro zone bank shares hit two-month lows today after the European Central Bank ECB raised interest rates by 50 basis points.
The ECB raised its benchmark interest rate by half a percentage point to 3.50%.
An index of euro zone banks fell by as much as 1.2% to its lowest since January 2 immediately after ECB announced increase in rates and indicated further rate hikes are on the cards.
Ordinarily a rate hike might boost banking shares who then have potential to boost their profits. However, the fear of banking system collapse is currently greater than the fear of runaway inflation in the economy.
16 March 2023 – Credit Suisse has had to get funds from its central bank in Switzerland to prevent its financial collapse causing chaos in whole global banking sector.
Credit Suisse secured a £45bn funding deal and its share price surged by 40%.
Overnight Credit Suisse said it would borrow up to 50bn francs (£44.5bn) from Switzerland’s central bank to shore up its finances. A wider banking crisis has been averted – for now.
Credit Suisse had sought help from Swiss National Bank after revealing it had found “material weakness” in its financial reporting via its external auditor PwC accountants.
Credit Suisse’s biggest shareholder, Saudi National Bank, declaring that it would not buy more shares in the bank but that is because it is not allowed to as it already owns 10% of shares. External national risk management governance rules prevents Saudi National Bank owning more.
The Bank of England has been in touch with Credit Suisse and Swiss authorities to monitor the situation.
The US central bank had been forced to step in to prevent a run on bank deposits across America as panic spread across bank depositors.
15 March 2023 – The European Central Bank has contacted banks to evaluate banks exposure to collapse of Credit Suisse, two supervisory sources told Reuters.
As Credit Suisse edges closer and closer to collapse its share price continues to collapse. Today I ts largest shareholder said it could not provide any more support.
The Wall Street Journal first reported earlier on Wednesday that ECB supervisors were looking into financial ties between Credit Suisse and euro zone banks, citing people familiar with the matter.
Not financial advise but is the old adage true – buy the rumour sell the news!
14 March 2023 – It is perhaps an acknowledgement by the FDIC, The Fed and US government that the banking system was close to collapse, that those in charge of American financial system have changed the rules over the weekend and said that all money deposited in US banks will be protected by effectively the American government.
13 March 2023 – Credit Suisse shares reached a new record low in early morning trading on Switzerland’s stock exchange.
Credit Suisse has been embroiled in a string of scandals. Switzerland’s second-biggest bank has begun a major overhaul of its business, cutting costs and jobs.
Last week it announced it was delaying the publication of its annual report following a call from the United States Securities and Exchange Commission, which raised questions about Credit Suisse earlier financial statement.
March 2023 – There is more than $22 Trillion in the U.S. banking system. The FDIC has $124.5 Billion on its balance sheet and a $100 Billion line of credit from the U.S. Treasury. FDIC assets cover only 1.26% of deposits. About the size of Silicon Valley Bank. One bank. Reference @GaborGurBacs
March 2023 – Second largest bank failure in U.S. history
British tech firms in danger of failing to pay their bills and going bust. UK facing systemic failure of tech financing.
UK arm of Silicon Valley Bank SVB, helps finance the Tech sector in the UK. Its collapse threatens the whole tech sector in UK.
The UK government is working with the Bank of England to support hundreds of UK tech companies survive the collapse of SVB.
The Bank of England announced on Friday that Silicon Valley Bank UK was set to enter insolvency, following action taken by its parent company in the US.
While Silicon Valley Bank (SVB) has a limited presence in the UK and does not perform functions critical to the financial system, it has been warned its collapse could have a significant impact on tech start-ups.
SVBUK said it will be put into insolvency from Sunday evening.
It is a subsidiary of Silicon Valley Bank (SVB) and was the first location it opened outside the US.
The insolvency announcement came after SVB was put under US government control on Friday afternoon in the biggest failure of a US bank since the 2008 financial crisis.
The BoE said the company will stop making payments and accepting deposits.
The move will allow depositors to be paid up to £85,000 from the deposit insurance scheme.
26 June 2022 – The world’s central bank umbrella body, the Bank for International Settlements (BIS), has called for interest rates to be raised “quickly and decisively” to prevent the surge in inflation turning into something even more problematic.
The Swiss-based BIS has held its annual meeting in recent days, where top central bankers met to discuss their current difficulties and one of the most turbulent starts to a year ever for global financial markets.
Trouble is many central banks don’t seem to have got the memo! The ECB for one big one has really failed to act in a significant way and not indicating interest rate increase until July 2022 at the earliest. An economic soft landing – where rates rise without triggering recessions – is not possible for most and a global recession is imminent.
It is probable that many central bank leaders thought that they could play with fire and let higher inflation whittle away the value and cost of their extortionate borrowings during the pandemic. However if you play with fire you tend to get your fingers burnt!
Central banks have been slow to act and have not acted aggressively enough. Central banks around the world acted expeditiously at the start of the pandemic. Pumping money into your economy is easy. Increasing interest rates and stopping quantitative easing should have been just as instantaneous in the light of exceptionally fast economic growth, rising inflation and a return to semi normal working. They have lost their credibility as masters of the economy. Either they are incompetent or they have acted in unison for their common purpose, not the benefit of people businesses or society.
How does central bank stop inflation?
17th May 2022 – Central banks around world will soon push for uplift in respective inflation target due to a failure of central banks to control rising inflation.
Central banks around the world including UK, USA and Europe have failed miserably do their pretty job in most cases of hitting 2 percent inflation. When it was easy to keep it close to target they patted themselves on back and strutted about positively. When it became hard to choose when to jump off Quantitative Easing QE and low interest rate gravy train, they’ve hit the buffers economically and its not going to look pretty for years now. If they had jumped off sooner they could have saved us all.
How do you deal with an economic collapse? Sri Lanka has already gone where many could go due to central banking mis-management in an interconnected business world. Wars and pandemics haven’t helped but neither have central bankers when it gets hard. It’s easy to pump money into an economy. A lot harder when you must turn off the money flow taps.
BusinessRiskTV
It was clear enough at the end of 2021 that the global economy and national economies were running hot hot hot. Assets across the board were buzzing along fuelled by cheap money sloshing around courtesy of central banks and national governments spending. Drunk on the easy life printing money and opening up near free money to every Tom Dick and Harry was always going to hurt if left unchecked. Being the party-pooper was not going to be good for central bankers reputation’s and careers if they called Time at the wrong time. They errored on the side of all drowning in money together instead of leaving the party early when it was still going strong. Weak leaders who led us dancing down a very dangerous economic path.
How do businesses respond to changing economic conditions?
Now that rampant inflation has been released, it can’t be put back in its box of 2 percent targets. Not without sustained period of global recession lasting many years. Instead of managing their respective economies down to 2 percent, central bankers around the world will try to convince us that a healthy level of inflation is no longer 2 percent It’s double that. Healthy inflation will become 4 percent! If you can’t hit your target, change the target will become the new norm.
30th April 2022 – Banks need to get back some ability to fight the next financial disaster.
Emergency lowest, or near lowest interest rates, are still in place. Quantitative Easing QE is still pumping into global economy already awash with cheap money pumped in over last 2 years with unprecedented levels of government spending.
Inflation was starting to take hold in 2021 and we fought the inflation embryonic fire with more petrol! We think the fire will burn out on its own with a few hand extinguishers of minor rate increases, or in Eurozone case just let the economy burn. We need rates to jump so we can put out the next fire. Expect inflation to stay around double healthy rate of inflation around the world throughout 2022 and 2023.
We need an early recession (pre- 2023) and increased unemployment to prevent a long term multi year depression.
BusinessRiskTV
We do that with a couple of 1 percent interest rate jumps now to give us a chance to get inflation under control.
Central bankers across the world have been too late to take action when inflation took off, calling it transitory – something not to tackle head on before it runs out of control. Their delay in acting means inflation is out of control in many parts of the globe including Europe, USA and UK. It is now impossible for wages to keep up with inflation at current levels of inflation meaning economic activity will reduce, or has already reduced. A full scale recession, perhaps depression is heading straight for the global economy. Companies across the broad spectrum of products and services feel they can get away with price rises. We as consumers have to show them they can’t to stop inflation and protect the businesses from going out of business due to falling demand. We accepted price rises after pandemic but enough is enough. We have to target profiteering businesses, stop buying from them and switch to retailers offering real value for money. This includes restaurants, pubs, grocery businesses, to gadgets and financial services. We must stop accepting that it is ok for prices to go up. If prices go up switch or stop buying that product or service.
21st April 2022 – UK regulator has instructed JP Morgan to review its approach to risk management amid a crackdown on reporting procedures of banks. The Prudential Regulation Authority (PRA) told JP Morgan to commission a section 166 review to analyse the accuracy of its reporting, inside sources told Bloomberg.
JPMorgan UK Risk Management Practices and Standards Review Credits: Bloomberg.com
Barclays Bank News and Reviews March 2022
BusinessRiskTV.com Barclays Bank loss on mishandled structured product sales. Sold nearly twice as many affected securities over a period of about a year as it was registered to sell in the United States! Now have to buy them back at loss and can’t do strategic share buy back as result! #BusinessRiskTV #ProRiskManager #BankingWhistleBlower Where’s your ESG approach to business development? #RiskManagement #GRC #ESGInvesting #ERM #enterpriseriskmanagement #riskmanagement #LipService
Libor banking scandal whistleblower reward
18th January 2022 – Greatest UK Banking Industry Risk Assessment Scandal
No not the fact that big banks are still being fined multi million pounds for poor risk management including failure to stop money laundering, 14 years after the financial crisis.
In 2019 we were told but many banking and financial services industry experts that Brexit would see a tsunami of City job losses as Brexit would force UK bankers to leave the UK to go to Germany or France to remain in EU. In 2022 hundreds of thousands of jobs were not lost. In fact tens of thousands of net new jobs have been created in the banking and wider financial services industry. How did so many supposedly expert financial risk assessors and risk managers get the impact of Brexit so wrong? If they can’t impartially advise the market place on the financial risk of Brexit why should we trust them to independently advice on other key risk events? Most financial risk experts were wrong in what they said in public and we should now ask them why.
It is clear now post-Brexit in 2022, that we should not trust financial services industry insiders and much of the main stream media to assess key risks, as they are not impartial independent financial advisors. They have paymasters to obey and bend down or over for.
The big threat to the banking and financial services industry was never the EU but USA and Asia Pacific. Brexit will make it easier to counter this threat not harder.
Deutsche Bank has been fined 150 million dollars for not trying to prevent Mr Epstein sending money to his coconspirators and Russian models.
Deutsche Bank allowed Epstein to make payments to women without adequate checks.
20th April 2020 British Banks Told By Bank Of England BoE To Open The Money Supply Taps To UK Businesses
The BoE Prudential Regulation Authority PRA reports that British based banks should use their capital and liquidity headroom to support the UK economy though the coronavirus pandemic.
The banks currently have substantial liquidity buffers including cash and short term bonds. In normal economic times they are obliged to maintain capital and liquidity to protect themselves from rainy days. Its raining but if banks do not help businesses out it could turn stormy and even develop into a hurricane.
Banks are expected to use their liquidity buffers in doing so even if it means liquidity coverage ratios LCR go significantly below 100 percent
PRA guidance to UK lenders
Banks are charged with lending up to 330 billion pounds to businesses but so far have only lent a small fraction of that amount under a government scheme to support companies struggling in the pandemic.
Banks will not face sanctions that would follow a breach of capital and liquidity thresholds set by the PRA in normal times.
Bank of England PRA
The PRA said it would also give lenders sufficient time after the crisis to replenish their liquidity and capital buffers.
31st March 2020 Systemic Banking Industry Collapse Rises As Coronavirus Pandemic Will Take A While To Burn Out
Governments around the world have failed to react quickly enough to contain the spread of the virus through their population. As a result the economic measures required to protect the national banking system need to be greater to control the economic impact of the virus.
How unstable was the banking system in the likes of Italy and India. China was not exactly immune but the coronavirus pandemic risk management control measures adopted by China have worked relatively quickly. However Italy and India were slow to react and now the humanitarian pain and economic pain threatens national banking systems. The threat to their banking systems threatens the global banking system.
26 March 2020 – Is my money safe in the US?
Are banks safe in USA?
The Federal Reserve central bank USA on 26 March 2020 said that banks in America can lend out every single cent they receive for money deposits. This effectively means USA banks could have zero cash held to give back to account holders. Previously, under fractional reserve banking rules, they had to keep a small percentage back.
Ultimately banks are from 26 March 2020 riskier places to leave your money. In essence your bank can choose not to keep any cash to pay out to its customers and just rely on the belief that there will never be a run on cash the banks hold.
2oth March 2020 Bank of England BoE Scrapping Annual Stress Tests For UK Lenders This Year
The BoE wants banks and building societies to focus on supporting consumers and businesses during the coronavirus outbreak with continued provision of credit.
18th March 2020 Anecdotal Evidence From Business Leaders That UK Commercial Banks Are Presently Trying To Charge Interest On Loans To Businesses Ranging From 8 Percent to 18.9 Percent When It Should Be 0 Percent Under Recently Announced £330 Billion Coronavirus Package
UK commercial retail banks and the UK government need to align the lending policy and practice by beginning of next week at latest to reduce the risk of businesses going bust before the cheap money is made available to keep them afloat.
14th March 2020 UK Banks Asked Bank of England To Scrap 2020 Stress Test of Lenders and To Soften Rules To Help Them Cope With Expected Losses From Coronavirus Pandemic
Senior bankers talking to Reuters News Agency have expressed their concern about impact of coronavirus on UK banks and have asked Bank Of England to be more flexible.
The Bank of Englands Financial Policy Committee monitors risks in the financial system and publishes findings at end of 2020. However UK banks will be fighting off effects of the worst financial crisis since 2008 financial crisis throughout 2020.
The BoE declined to comment on the stress test. The Treasury said it was a matter for the BoE. The BoE has repeatedly said the British banking sector is holding enough capital.
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11th March 2020 UK Will Fully Implement Globally Agreed Bank Capital Rules That Were Response To Financial Crisis In 2008
Basel capital rules were introduced financial regulators around the world to prevent a recurrence of the 2008 financial crisis..
31st January 2020 Lloyds Bank Issued Guidelines To Branch Managers On Treating Staff Fairly
Lloyds senior management team have issued the guidelines after a rise in complaints to Accord union about working conditions across the branch network.
Examples of staff complaints included demands to work in their own time asking junior staff to open and close branches and long distance commutes resulting from staff switching to new branches after their local one closed.
Given the advance of fintech technology and banking businesses with no branch network it is likely that Lloyds will close many more branches over the coming years if they are to compete with new competition.
29th January 2020 Banks Paid Out More Than 36 billion dollars In Fines Since 2008 Financial Crisis According To Fenergo
Swiss banks were the worst offenders in 2019 with 5 billion dollars in fines and damages handed to UBS for helping French clients evade tax authorities.
HSBC were fined nearly 2 billion dollars for being used to launder money between a Mexican and Colombian drug cartel.
2019 was another record year for fines the second biggest in history and 2020 is shaping up to be a very busy year in this space
Laura Glynn Global Compliance and Regulatory Director of Fenergo
11th December 2019 Small UK Banks Call For Banking Regulations For Smaller Banks To Be Eased To Increase Competition In Banking Industry
26th November 2019 Bank Leader Quits Over Money Laundering Scandal
26th November 2019 Citi Bank Fined 44 million pounds by Prudential Regulation Authority PRA For Financial Health Reporting Errors
The Prudential Regulation Authority PRA fined Citi bank European operations for serious and widespread failing in the way reports were made to PRA..
Citi banks UK regulatory reporting framework was not designed implemented or operating effectively and Citi bank failed to submit complete accurate regulatory returns to the PRA.
The failings related to legally required reports on capital and liquidity. Banks are legally required to provide regular updates on these measures and must maintain minimum standards to ensure they can survive should any financial shocks occur.
Citi banks failure relates to the reporting requirement rather than lack of capital or liquidity. However the reporting error would have resulted in 63 million fine had Citi bank not cooperated fully with the PRA.
14th November 2019 When Banking Goes Wrong Bank Customers Need Help From Government or Regulators To Protect and Get Their Money Back
13th November 2019 Competition For Traditional Retail Banks Continues To Escalate
An App only bank in UK has won Best British Bank and Best Current Account 2019. Facebook Amazon and Google are just a few of the big players working in partnership to offer banking services. What are the biggest banks in the UK and the world doing innovatively to continue to grow other than working in partnership with internet business giants to provide back office and regulatory knowledge and experience?
Can the big UK retail banks actually bring a product or service to the marketplace that will not result in massive fines and compensation for mis selling!
Bank competitors are global have pots of cash and are extremely innovative dynamic and successful. Given that Royal Bank of Scotland is struggling to make a small profit more than a decade after the financial crisis it does not bode well for traditional retail banks in UK unless they can at least start to more innovatively than who can we buy like Lloyds Bank and Metro Bank!
22nd October 2019 Banks may need to merge before next financial crisis to protect banking system
Close to 60 percent of the worlds banks are not strong enough to survive another financial crisis.
9th September 2019 Unlikely That Banking Industry Has Learned From 50 Billion Pound Plus Mistake
UK banking shares slide again today on news that claims for Personal Protection Insurance PPI have been much higher than was anticipated. It is likely that the final compensation bill for PPI misselling will exceed 50 billion pounds.
However the true cost to banks will fastly exceed 50 billion pounds. The destruction in banking shares value has cost banking shareholders dearly in lost captial value and lost dividends that would otherwise have been paid out had compensation to banking customers not needed to have been paid out.
Who could have thought that an insurance policy to protect banking customers who fell on bad times due to ill health or unemployment could have caused so much financial and reputational damage? Well bank managers!
Banking industry risk management should have meant that a valuable insurance protection was brought to the marketplace that helped protect customers and increased profit for banks. Not hard. At least it should not have been hard.
BusinessRiskTV
This suggests that bank managers will once again bring banking products and services to the marketplace that result in massive payouts and reputational damage to banks. In fact this is more than a suggestion. Banks whilst in the middle of handling billions of pounds in compensation claims for PPI customers were and are being punished for a wild variety of poor risk management decisions surrounding new bank products and services.
The people of the UK have the banking industry they deserve. The vast majority of PPI claimants were happy to buy PPI cover to protect them should they fall on hard times. Most would have been able to claim though some shockingly would not for example some self employed. However the vast majority of the 50 billion pounds paid out should not and the vast majority of claimants should not have claimed if they had any moral values. They know they were happy with the protection from hard times but claimed anyway cause they could.
When the banking industry throws up the next financial scandal the people of the UK should remember their actions on PPI claims. They are as bad as bad bank managers.
BusinessRiskTV
The only upside from this banking industry debacle is that more than 50 billion has been paid into the UK economy. Holidays new cars new furniture wild nights out etc have all supported the UK industry since the financial crisis in 2008 which was of course caused by yet another example of poor banking risk management.
The banking industry needs to learn from past mistakes. Trouble is it has not. Light touch banking industry regulation is very dangerous. We need it so that we can release billions of pounds of wasted money stored up to cope with the next financial sector risk management disaster.
Unfortunately that money stockpile is necessary as the financial services industry is incapable of bringing new products and services to the marketplace without creating the base for the next financial crisis.
23rd August 2019 CMA Criticises RBS and Santander Over PPI Processes
The competition watchdog Competition and Markets Authority CMA has instructed Royal Bank of Scotland and Santander to improve their payment protection insurance PPI processes. The CMA says they do not communicate appropriately with their customers.
RBS and Santander PPI process fail to comply with a 2011 order by CMA which required PPI providers to send customers an annual reminder setting out how much was paid for their policy the type of cover they had and their right to cancel.
Both banks have been instructed to appoint an independent auditor to assess their PPI processes.
BusinessRiskTV
Banks can be fined for inappropriate PPI processes and failure to communicate suitably to PPI customers.
The banking industry in the UK will end up paying out some 50 billion pounds in compensation for mis-selling payment protection insurance PPI. An incredible destruction in bank valuations and all because the banking industry failed to manage risk properly.
21st August 2019 Barclays Bank Digital Banking Shutdowns Worst In UK
According to analysis by the BBC bank customers experience more than 10 digital banking shutdowns a month on average.
Barclays reported 33 incidents in the 12 months to the end of June this year
BBC
Digital banking customers with Barclays bank suffered the most outages in the last 12 months.
9th August 2019 Malaysia Charged 17 Former And Current Goldman Sachs BankersOver Corruption Investigation Into State Development Fund 1MDB
Amongst those charged is Richard Gnodde the most senior banker in London. Goldman Sachs is defending charges. If convicted those charged could face prison sentences of up to 10 years.
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25th December 2018 The Big Short might be a good film to watch at this moment of time
What direction are the financial markets going? Could the debt socked economy be prelude to the next financial crisis. Stock markets around the world are falling. Has the bubble burst? Will it deflate more in 2019?
18th December 2018 Santander Fined More Than 30 Million Pounds For Probate Management Failures
The Financial Conduct Authority FCA says Santander failed to transfer funds worth more than £183 million to beneficiaries. In addition Santander did not disclose information about the probate issues to the FCA after it became aware of them. 40428 customers were directly affected.
These failings took too long to be identified and then far too long to be fixed
Mark Steward executive director of enforcement and market oversight at the FCA
Firms must be able to identify and respond to problems more quickly especially when they are causing harm to customers.
Santander banks probate and bereavement processes had a limited ability to identify all the funds it held of a dead customers estate and suffered from failings to follow up with representatives of the dead customer which increased the likelihood of the cases not being closed
There was also ineffective monitoring of open cases to determine if they should be closed. This means a dead customers case would remain incomplete and funds would not be transferred to those who were entitled to them.
Furthermore some funds belonging to dead customers would not be identified and transferred to those who were entitled to it. These people would have been unaware the funds existed.
17th December 2018 Goldman Sachs Charged In Malaysia
Malaysias attorney general has filed criminal charges against Goldman Sachs related to the theft of billions of dollars from the countrys development fund.
Charges were bought against Goldman Sachs investment bank and its former employees Tim Leissner and Roger Ng. Jasmine Loo Ai Swan and Jho Low two former employees of Malaysias sovereign fund 1MDB were also charged.
The charges relate to the long running scandal centring around 1MDB. Authorities around the world have been investigating claims that billions were stolen from 1MDB for several years. Earlier this year former Malaysian prime minister Najib Razak was arrested on anti corruption charges as part of a probe into 1MDB.
Malaysian authorities accused Goldman Sachs of helping to facilitate the stealing of 2.7bn dollars from government backed bond issues that raised 6.5bn dollars. The three bonds were issued by 1MDB a government owned strategic development fund in 2012 and 2013. Goldman Sachs helped arrange the issues.
Malaysias attorney general accused two Goldman employees involved in the deal of conspiring with 1MDB employees to bribe Malaysian public officials in order to procure the selection involvement and participation of Goldman Sachs in these Bond issuances.
Goldman received 600 million dollars for helping to underwrite and arrange the bond issues which the attorney general said was several times higher than the prevailing market rates and industry norms.
14th November 2018 UK Banks Failing To Assess Risks According To FCA Review of Whistleblowing Procedures
According to the regulator the Financial Conduct Authority FCA most banks in Britain are not assessing and escalating whistleblower concerns consistently and some need to improve arrangements to protect those who lift lid on wrongdoing from victimisation.
The FCA says UK banks need to document whistleblowing investigations and should differentiate training programmes for staff managers and internal investigators.
A new All Party Parliamentary Group on Whistleblowing was registered in August 2018 to propose best practice whistleblower legislation to UK parliament to enact
BusinessRiskTV
Banking leaders still need to do more to cultivate and communicating risk management culture so that whistleblowers come forward to identify wrongdoing early. Banking leaders need to do more to assess how whistleblowing arrangements are working in practice.
14th November 2018 Former UK UBS Trader Deported From UK
Former UBS trader Kweku Adoboli who was jailed for causing Swiss Bank more than 2 billion dollars in losses via fraudulent trading is being deported from UK to Ghana.
He had served half of his 7 year sentence for fraud before being released in 2015. As a foreign national given a custodial sentence he was in line for deportation back in 2015 but he lodged several appeals against deportation which all failed. Born in Ghana he left when 4 and came to UK aged 12.
It was alleged that UBS senior managers were fully aware of his activities and encouraged him to take risks to make profits for the bank. However prosecutors argued he exceeded his trading limits failed to hedge trades and faked records to cover his tracks between 2008 and 2011. When he was arrested UBS share price fell 10 percent.
14th November 2018 Banking Whistleblower Compensated By Lloyds Bank
Lloyds Banking Group said it had settled with an ex employee who accused former bosses of concealing a massive fraud at its HBOS Reading unit prior to a record breaking cash call needed to keep the combined group afloat in 2009.
The bank apologised to Sally Masterton a former senior manager at Lloyds and that it had agreed to pay her financial compensation.
1st November 2018 Former Goldman Sachs Bankers Charged
USA Department of Justice have brought criminal charges against two former Goldman Sachs bankers and Malaysian financier Jho Low in connection with Malaysia state development fund 1MDB scandal
One Goldman banker admitted to conspiring to launder money and violate a US anti bribery law
Department of Justice USA
The other banker has been arrested while Mr Low remains at large.
It is alleged that corrupt officials stole billions from the Malaysian state fund. Former Malaysian prime minister Najib Razak has also been charged with corruption.
USA authorities have also filed civil suits aimed at recovering luxury goods cash and other items purchased with money fraudulently extracted from the fund.
Goldman Sachs is cooperating with the investigation into the fraud.
9th October 2018 HSBC Settles Claims For Compensation Selling Mortgage Backed Securities
HSBC has agreed to pay 765 million dollars to settle claims connected to residential mortgage backed securities sold prior to the financial crisis.
HSBC settled the claims for compensation without admitting liability or wrongdoing.
Others have paid to settle claims against them
Wells Fargo 2 billion dollars
RBS 5 billion dollars
JPMorgan Chase 13 billion dollars
Bank of America 17 billion dollars
12th July 2018 Two Former Senior Bankers Convicted of Manipulating Euro Interbank Offered Rate Euribor Between 2005 to 2009
Phillipe Moryoussef was a trader with Barclays Bank and Christian Bittar was principal trader at Deutsche Bank.
The Serious Fraud Office SFO says the two convicted traders conspired together to submit false or misleading Euribor submissions to benefit their positions and change the published rate
21st June 2018 TSB Bank May Not Have Tested Its Technology Properly
TSB may not have carried out proper tests before transferring five million customers to a new IT system.
IBMs reported into the PR disaster suggests TSB Bank may have failed to understand the risks involved or to carry out proper tests. TSB Bank said IBMs report was not a fair reflection of what happened. IBMs report has now been published by MPs on the Treasury Committee.
Consumer group Which? said that TSB had clearly been unprepared for IT changes.
Hundreds of TSB Bank customers to lost money from their accounts as a result of fraud.
MPs on the Treasury Committee have previously called on Paul Pester the chief executive of TSB to resign.
20th June 2018 Ex CEO Anglo Irish Bank Jailed For 6 Years
The former chief executive of Anglo Irish Bank has been jailed for 6 years for inflating the banks balance sheet. David Drumm was convicted of conspiracy to defraud and false accounting. His sentence took into account the 5 months he spent in custody in the USA before being extradited to Ireland to face trial.
5th June 2018 Australia Charges Former Citi Deutsche and ANZ Senior Executives
Australian regulators the Australian Competition and Consumer Commission ACCC charged former local bosses of Citigroup Inc Deutsche Bank with criminal cartel offences over a 2.3 billion dollar stock issue in 2015.
The regulator charged Citis former Australia chairman Stephen Roberts its current local head of capital markets John McLean and its London-based head of foreign exchange trading Itay Tuchman. In addition it charged Deutsches former local chief Michael Ormaechea and former local capital markets head Michael Richardson.
It said charges were also laid against ANZ treasurer Rick Moscati. ANZ Citi and Deutsche are defending charges.
If successfully convicted large fines can be imposed and guilty people face prison terms of up to 10 years. Those charged will appear in court on 3rd July 2018.
4th June 2018 French Banking Giant Agrees Fine
Societe Generale has agreed with USA and French regulators to a settlement on poor banking practices surrounding Libya and on its handling of the ‘IBOR’ money market rates.
Societe Generale agreed to pay a 250 million euro fine to french treasury as part of its settlement linked to Libya. It as accounted for 2.3 billion euros regarding those various probes.
SocGen has already agreed to pay 1 billion euros to settle dispute with the Libyan Investment Authority.
12th April 2018 Should Bank Of England BoE Panels Be Kept Apart
There are calls to merge the monetary and financial policy committees due to roles overlapping. However the BoE Deputy Governor Ben Broadbent thinks this would overload policymakers and raise the risk of the kind of mistakes that helped lead to the financial crisis in 2007-08.
31st March 2018 Barclays To Pay $2 Billion Penalty
Barclays bank has agreed to pay American government $2 billion over the sale of mortgage backed securities which is part of the financial crisis.
The USA justice department has been investigating allegations that Barclays bank caused billions of dollars of losses to investors with an alleged fraudulent scheme.
Can banks legally confiscate your deposit money in your bank?
The fact is, any money you store in a banking institution now becomes an unsecured debt, and you become an unsecured creditor that is called on to share in the burden of a bank loss. You have little- to-no legal recourse. Act gives the right for banks to confiscate those funds in and use them as needed.
Depositors in two Cypriot banks lost billions when savings were confiscated to protect the island’s banking system in 2013, in a process known as a bail-in. The move was a condition sought by international creditors for a 10 billion euro bailout.
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USA : According to the 2022 CFA Institute Investor Trust Study, 94% of state and local pension plans had some crypto exposure.