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Showing posts with label Bank of England. Show all posts
Showing posts with label Bank of England. Show all posts

Monday, July 16, 2012

Libor scandal blows to British banking system

The still-developing Libor scandal is the latest and biggest blow to the credibility of big banks and their regulators, and should catalyse wide-ranging reforms to the financial system.

THE reputation and credibility of banks, regulators and the banking system in Western developed countries, already battered by the twists and turns of the financial crises, have reached new lows with the Libor scandal, which is still evolving and will yet reveal more wrong-doing. Blow ... Barclays >>

Besides Barclays Bank, which has paid US$456bil (RM1.45 trillion) in penalties to the British and US authorities, at least another 11 banks that were part of the rigging of Libor face up to US$22bil (almost RM70bil) in penalties and damages to investors and counterparties, according to an article in The Financial Times.

This is likely to be an underestimate because in addition, they may also face fines of billions of dollars or euros from anti-cartel actions. And more than the 12 banks that are publicly named are involved.

The Libor scandal could not have come at a worse time because the banking sector is already mired in many deep crises.

That the biggest banks in the world have been manipulating the revered Libor rates, which the public for so many years considered something that is set objectively and scientifically, is almost unimaginable.

The manipulations were reportedly of two types: to influence Libor rates so that the bank could make profits in its derivatives trades, and to dishonestly portray that its own borrowing costs were lower than what they were, so as to raise the bank’s image.

The scandal hits at the heart of the global banking business, because Libor (the London Interbank Offered Rate), is the benchmark relied upon for many thousands of contracts in the financial world.

This new hit to the banks’ credibility comes at a time when there are new signs of a serious downturn in the global economy.

In particular, the growth rates of many major developing countries have declined significantly in the last three months, signifying that the banking and debt crises in Europe are beginning to have a serious impact on the developing world.

The Libor scandal may contribute to the deteriorating world economic situation.

At the least, the banks involved in the scandal may have a worsened financial position, with less credit to provide to the real economy.

The estimated fines would cut 0.5% off their book value, and each bank may also have to pay an average of US$400mil (RM1.27bil) because of lawsuits, according to a study by Stanley Morgan, as reported in The Financial Times.

This may only be the tip of the iceberg. Regulators in many countries, other than Britain and the United States, are investigating, including Canada, Japan, and Switzerland, while many corporations and lawyers are considering lawsuits against the banks. The credibility of the European and US regulators have also been affected.

Either they did not know about the manipulations of the banks and were thus not doing their job, or they knew about it and allowed the deception to continue for years.

Manipulation in the Libor system was apparently known, at least in the trade, by 2005.

In April 2008, an article in Wall Street Journal raised questions about the way Libor was set.

Last week (on July 13), documents released by the New York Federal Reserve showed that US officials had evidence from April 2008 that Barclays was knowingly posting false reports about the rate at which it could borrow, according to several news reports, including in the Wall Street Journal.

A Barclays employee told a New York Fed analyst on April 11, 2008: “So we know that we’re not posting, um, an honest Libor.”

He said Barclays started under-reporting Libor because graphs showing the relatively high rates at which the bank had to borrow attracted “unwanted attention” and the “share price went down”.

The Fed analyst’s information and concerns were passed on to Tim Geithner, then head of the New York Fed.

In June 2008, Geithner sent a memo to the Governor of the Bank of England, with six proposals to ensure the integrity of Libor, including a call to “eliminate incentive to misreport” by banks.

The documents show that the US authorities knew about irregularities in the Libor interest-rate market and had discussed the need for reforms with the British authorities as far back as mid-2008.

The question being asked is why the regulators did not act until this year.

The Libor scandal may be, or should be, the final straw that forces the developed countries’ political leaders and financial authorities to undertake a thorough and systemic reform.

The financial system has been plagued by one crisis and scandal after another, and of crisis responses.

There needs to be reform of the regulatory framework and enforcement, the hugely excessive leveraging allowed by financial institutions, the laws that permit a combination of commercial banking and proprietary trading in the same institution, the speculative and manipulative activities and instruments of financial institutions, fraudulent practices and the incentive system, including unjustified high pay and bonuses and high rewards to bankers for speculation-based earnings.

A reform of the Libor system or establishing an alternative to it is of course also required.

In the Libor system, a panel of banks will set the borrowing rates for 10 currencies at 15 different maturity periods.

Two types of manipulation emerged in the Barclays case.

The first involved derivatives traders at Barclays and several banks trying to influence the final Libor rate to increase profits (or reduce losses) on their derivative exposures.

The second manipulation involved submissions by Barclays and other banks of estimates of their borrowing costs which were lower than what was actually the case.

Almost all the banks in the Libor panels were submitting rates that may have been 30-40 basis points too low on average, according to The Economist.

GLOBAL TRENDS By MARTIN KHOR newsdesk@thestar.com.my

Related posts:
Four British banks to pay for scandal! 
British rivate banks have failed - need a public solution 
After Barclays, the golden age of finance is dead 
UK Banking Rules Risk Bank's Future Market Value 
RBS, biggest British stated-owned bank losses of £3.5bn ! 
Cost of bank bailout keeps rising for UK 

Thursday, May 17, 2012

UK bank governor warns of eurozone debt crisis 'storm'; Eurozone 'very close to collapse'!

The Bank of England has cut its growth forecast for this year to 0.8% from 1.2%, saying the eurozone "storm" is still the main threat to UK recovery.
The eurozone was "tearing itself apart" and the UK would not be "unscathed", said its governor Sir Mervyn King.

He also confirmed that the Bank has been making contingency plans for the break-up of the euro.

The rate of inflation will remain above the government's 2% target "for the next year or so", the Bank said.

Sir Mervyn was presenting the Bank's quarterly inflation report.

He told a news conference that the euro area posed the greatest threat to the UK recovery, and there was a "risk of a storm heading our way from the continent".

"We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

"The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic," Sir Mervyn said.

“Start Quote

European policymakers, I suspect, will not rush to thank him for his kind and timely advice”
A 'mess'

Andrew Balls, the managing director in London of global investment firm Pimco, said it was reasonable for Sir Mervyn and other policymakers to plan for a Greek exit.

"Yes, maybe they should plan for an exit, but the thing is, speculating about it can make the event more likely, so the Europeans really do have a mess there," he told the BBC.

"If Greece is to slide out of the euro and collapse, how are they going to protect Ireland, Portugal, Spain and Italy?"

Separately, Prime Minister David Cameron also spoke of the financial storm clouds across Europe, warning that eurozone leaders must act swiftly to solve its debt crisis or face the consequences of a potential break up.

He said during Prime Minister's Questions in the House of Commons: "The eurozone has to make a choice. If the eurozone wants to continue as it is, then it has got to build a proper firewall, it has got to take steps to secure the weakest members of the eurozone, or it's going to have to work out it has to go in a different direction,

"It either has to make up or it is looking at a potential break up. That is the choice they have to make, and it is a choice they cannot long put off."

The Bank's report said, however, that the eurozone crisis was not the only issue weighing on the UK economy, with volatile energy and commodity costs, and the squeeze on household earnings also having an impact.

Andrew Balls, of global investment firm Pimco says, "a disorderly outcome for Greece is going to be bad for the global economy". 


It all meant that the UK economy would not return to pre-financial crisis levels before 2014, Sir Mervyn said.

Nevertheless, he remained optimistic about the longer term. "We don't know when the storm clouds will move away. But there are good reasons to believe that growth will recover and inflation will fall back," he said.

On quantitative easing, he said that no decisions had been made whether or not to continue pumping money into the economy. The last stimulus programme was still "working its way through the system".

'Outlook is probably better'
 
Sir Mervyn's comments came on the day that official unemployment figures showed a fall in the jobless rate, underlining recent surveys that the private sector had become more confident about hiring labour.

He said the fall in joblessness was consistent with the expected gradual recovery in the UK economy.

But Graeme Leach, chief economist at the Institute of Directors, said of the Bank's report: "Talk about kicking an economy when it's down.

"On top of the euro crisis and a double-dip recession, the Bank of England is now saying inflation may not fall fast enough to permit more quantitative easing.

"Actually we think the inflation outlook is probably better than the Monetary Policy Committee (MPC) thinks, with the impact of the euro crisis, declining real incomes and weak money supply growth suggesting inflationary pressures may recede later this year and into 2013.

"After many years of underestimating inflationary pressure let's hope the MPC is now making the opposite mistake by overestimating it".

Ed Balls, Labour's shadow chancellor, said: "The Bank of England has once again slashed its growth forecast for Britain, but despite this the government says it will just plough on regardless with policies that are hurting but not working.

"The governor is right to warn of a coming storm from Europe. That is why we warned George Osborne not to rip up the foundations of the house and choke off Britain's recovery with spending cuts and tax rises that go too far and too fast.

"What happens in the eurozone in the coming weeks and months will have an impact on our weakened economy," Mr Balls added.-  BBC

Eurozone was 'very close to collapse'

Eurozone was 'very close to collapse'

A European Central Bank board member has conceded the ECB may have "saved" the eurozone banking system and eurozone economy in Autumn 2011 by providing one trillion euros of emergency loans to hundreds of European banks at an interest rate of just 1%.

ECB Executive Board member, Benoit Coeure, told Robert Peston: "We were very close to a collapse in the banking system in the euro area, which in itself would have also led to a collapse in the economy and deflation, And this is something that the ECB could not accept."

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Thursday, June 30, 2011

Tsunami of repossessions, home prices declined in UK & US !





Bank chief warns of wave of home repossessions if rates rise

UKAR chief presiding over £80bn of bailed-out mortgages says 'tough love' would be fairer on those struggling with payments
  • Jill Treanor  guardian.co.ukHouses
UKAR chief Richard Banks has warned that mass home repossessions could follow any interest rate rise Photograph: Owen Humphreys/PA

Britain is facing a 'tsunami' of house repossessions as soon as interest rates start to rise, one of the country's leading bankers has warned.

Richard Banks, the chief executive of UK Asset Resolution (UKAR), the body that runs the £80bn of mortgages bailed out by the taxpayer during the banking crisis, also said in an interview with the Guardian that the Labour government's pleas at the start of the crisis for lenders to keep families in their homes was forcing some homeowners further into debt.

In a warning that the industry may have been too lenient with some of its customers, he said he believed a policy of "tough love" would be fairer to people facing long-term difficulty in keeping up payments on loans taken out when house prices were at their peak and personal incomes on the rise.

His warning came the day after the international bank regulator said the Bank of England, which has kept rates at 0.5% for more than two years, would have to raise rates shortly to curb inflation.

The Bank of International Settlements said the policy of the Bank of England, whose rate-setting committee is split over whether or not to increase borrowing costs, was "unsustainable".

With 750,000 customers, UK Asset Resolution, set up to run the nationalised mortgages of Bradford & Bingley and parts of Northern Rock, is the country's fifth largest mortgage lender. But 23,000 of those mortgage holders are more than six months behind with payments and Banks admitted the projections for the number of people falling behind on payments could get "scary" if lenders did nothing to prepare for higher rates.

"You can see if you don't do something about it, you can see a tsunami," he said. "If you don't get into the hills you could get drowned by this. If you don't manage this properly it could get very messy."

He regards it is an industry-wide problem, albeit one that might be concentrated at UKAR as its customers include buy-to-let landlords and so-called self-certified borrowers – those without salaried income. UKAR, through three calls centres in Crossflatts, West Yorkshire, Gosforth, Newcastle, and Doxford, Sunderland, has begun cold-calling customers it believes are at risk of falling behind on payments in an attempt to keep their mortgage payments on schedule.

The bank is also trying to tackle customers behind with payments for six months or more and at risk of repossession.

His concern about a surge in repossessions is partly the result of moves by the industry early in the 2008 crisis to grant so-called forbearance to help customers stay in homes by, for example, reducing monthly interest payments. "We as an industry, as a kneejerk reaction in the emergence of the crisis, and because the government asked us to be forbearing to customers in the hope it would all go away, we have been too lenient with some customers.

"It's a tough love approach," he said. "It's treating customers fairly, not nicely, because if you can't afford your mortgage you are only increasing your indebtedness. If we allow you to increase your indebtedness, that's not really fair to you."

This month the Council of Mortgage Lenders forecast a rise in repossessions from 40,000 this year to 45,000 next. This figure would still remain well below the 75,500 peak of 1991. The remarks by Banks follow a warning last week from the new regulator set up to spot financial risks in the system – the Financial Policy Committee (FPC) inside the Bank of Englandthat warned banks may be providing a "misleading picture of their financial health" if they were not making big enough provisions for borrowers in difficulty.

Forbearance has been brought into play in up to 12% of mortgages, the FPC said.

It also noted that the most "vulnerable" households were concentrated in a few banks. It did not scrutinise UKAR but noted that the two other bailed-out banks, Lloyds Banking Group and Royal Bank of Scotland, had the largest exposure to customers whose mortgages were bigger than their value of their homes.

Last month, the Financial Services Authority issued a guide to handling forbearance in which it warned: "Arrears and forbearance support provided with due care by firms has a beneficial impact for both the firm and the customer … However, where such support is provided without due care or any knowledge or understanding of the impacts, it has potentially adverse implications for the customer, for the firm's understanding of the risks inherent within its lending book, and in turn for the regulators and the market."

House prices down in England and Wales

LONDON: House prices in England and Wales have edged lower this month to show their biggest annual fall since October 2009, a monthly survey from property data company Hometrack showed on Monday.
Average house prices dropped by 0.1% in June, continuing a pattern of modest falls so far this year and taking the year-on-year decline to 3.9%.

Other house price surveys have shown similar price falls over the past 12 months. Prices dropped by around 20% during the financial crisis, but partly recovered in early 2010.
Hometrack's director of research Richard Donnell said that the property market had been less weak so far this year than he had expected.

A general view of houses in Grange Villa, England. — AP
 
“Low transaction volumes, low mortgage rates and forbearance by lenders limiting the number of forced sales have all played their part. While average prices have slipped back by 1%, sales volumes have increased off the back of higher demand and greater realism over achievable prices,” he said.

House prices are under pressure from slow wage growth and lenders' preference for much higher mortgage deposits than before the financial crisis.

Hometrack's data is based on a monthly survey of estate agents and surveyors, asking for average achievable prices for different categories of property. - Reuters


Home Prices in 20 U.S. Cities Probably Declined in April From Year Earlier

Home Prices in U.S. Cities Fell 4% in April from Year Ago
Home prices probably decreased in April, showing the housing market remains an obstacle for the U.S. recovery, economists said before a report today.

The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from April 2010, the biggest year-over-year drop since November 2009, according to the median forecast of 30 economists surveyed by Bloomberg News. Other data may show consumer confidence held near a six-month low.

A backlog of foreclosures and falling sales indicate prices may decline further, discouraging builders from taking on new projects. The drop in property values and a jobless rate hovering around 9 percent are holding back consumer sentiment and spending, which accounts for 70 percent of the economy.


“Home prices remain incredibly bogged down by foreclosures and weak demand,” said Sean Incremona, a senior economist at 4Cast Inc. in New York. “The picture is unlikely to change much this year. Declining home prices and high unemployment are bad for confidence.”

The S&P/Case-Shiller index, based on a three-month average, is due at 9 a.m. New York time. Survey estimates ranged from declines of 4.9 percent to 3.5 percent. Values fell 3.6 percent in the 12 months to March.

The New York-based Conference Board’s consumer confidence gauge, due at 10 a.m., rose to 61 from 60.8 in May, according to the Bloomberg survey median. Estimates ranged from 55 to 66.7.

Fuel Costs

Some of the improvement probably reflects a drop in fuel costs. The average price of a gallon of regular gasoline fell to $3.57 on June 26, down from a May 4 price of $3.99 that was the highest in almost three years, according to AAA, the nation’s largest auto club.

The projected rise in confidence contrasts with other surveys in which Americans’ moods dimmed. The Bloomberg Consumer Comfort index dropped in the week ended June 19, the first decline in five weeks, and the Thomson Reuters/University of Michigan sentiment gauge fell more than forecast this month.

The Case-Shiller report may show home prices fell 0.2 percent in April from the prior month after adjusting for seasonal variations, the 10th straight decrease, according to the Bloomberg survey.

The year-over-year gauges provide better indications of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Shiller told a conference in New York this month that a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.”

Fewer Sales

Reports earlier this month showed the housing market is yet to gain momentum. Sales of previously owned homes, which comprise about 94 percent of the market, were down 3.8 percent last month from April, the National Association of Realtors said.

Purchases of new houses dropped 2.1 percent in May, the first decline in three months, according to Commerce Department data. Competition from foreclosed homes is hurting demand for newly built dwellings.

The 1.8 million-unit inventory of distressed homes nationwide that may reach the market would take about three years to sell at the current pace, Daren Blomquist, communications manager at RealtyTrac Inc., said this month.

As house prices decline, owners feel less wealthy and home equity shrinks, making borrowing more difficult.

The Standard & Poor’s Supercomposite Homebuilding index lost 4.4 percent as of June 27 from the end of April, less than a 6.1 percent drop in the broader S&P 500 gauge, which was weighed down largely by concern about the European debt crisis.

Builder Outlook

Some developers expect demand to stabilize following a poor selling season. Lennar Corp. (LEN), the third-largest U.S. homebuilder by revenue, last week said second-quarter sales fell from a year earlier and home orders were little changed, while the average price climbed. The 2010 orders were boosted by a federal tax credit for homebuyers that required contracts be signed by April 30.

“While it’s now well documented that the expected spring selling season of 2011 simply did not materialize, it is beginning to feel like the worst days of the housing market are getting behind us,” Chief Executive Officer Stuart Miller said during a conference call with analysts on June 23.
Bloomberg Survey

================================================================
Case Shiller Cons. Conf
MOM% YOY% Index
================================================================

Date of Release 06/28 06/28 06/28
Observation Period April April June
----------------------------------------------------------------
Median -0.2% -4.0% 61.0
Average -0.2% -4.0% 61.0
High Forecast 0.4% -3.5% 66.7
Low Forecast -0.5% -4.9% 55.0
Number of Participants 17 30 70
Previous -0.2% -3.6% 60.8
----------------------------------------------------------------
4CAST Ltd. --- -4.1% 61.5
ABN Amro Inc. -0.1% --- 61.0
Action Economics --- --- 63.0
Aletti Gestielle SGR --- --- 60.0
Ameriprise Financial Inc --- --- 61.5
Banesto --- -4.1% 61.7
Bank of Tokyo- Mitsubishi --- --- 59.0
Bantleon Bank AG --- --- 60.0
Bayerische Landesbank --- -4.0% 62.0
BBVA --- -3.9% 60.8
BMO Capital Markets --- -4.4% 62.0
BNP Paribas --- --- 58.0
BofA Merrill Lynch Resear --- -3.9% 61.0
Briefing.com --- -3.8% 59.0
Capital Economics -0.4% -4.1% 65.0
CIBC World Markets --- -4.2% 62.5
Citi --- --- 61.0
Commerzbank AG --- -4.0% 60.0
Credit Agricole CIB --- --- 62.0
Credit Suisse --- -3.8% 55.0
Daiwa Securities America --- --- 62.0
DekaBank --- --- 61.5
Desjardins Group --- -3.9% 61.0
Deutsche Bank Securities --- --- 62.0
Exane --- --- 61.5
Fact & Opinion Economics --- -3.5% 59.0
First Trust Advisors --- --- 59.9
FTN Financial --- --- 60.0
Helaba --- --- 60.0
HSBC Markets -0.2% -3.9% 60.0
Hugh Johnson Advisors --- --- 60.5
IDEAglobal --- -4.0% 60.0
IHS Global Insight --- -3.9% 61.0
Informa Global Markets --- --- 61.0
ING Financial Markets -0.2% -3.9% 63.0
Insight Economics --- -3.9% 59.0
Intesa-SanPaulo --- --- 63.0
J.P. Morgan Chase -0.1% -3.8% 60.5
Janney Montgomery Scott L -0.3% -4.8% 62.0
Jefferies & Co. --- --- 62.0
Landesbank Berlin --- --- 58.0
Manulife Asset Management --- --- 61.0
Maria Fiorini Ramirez Inc --- --- 62.5
MF Global -0.5% -4.2% 60.5
Moody’s Analytics --- --- 59.0
Morgan Stanley & Co. --- --- 64.0
Natixis --- -4.0% 61.0
Nomura Securities Intl. --- -3.9% 59.8
Nord/LB --- --- 60.0
Parthenon Group -0.4% --- 59.7
Pierpont Securities LLC --- --- 64.0
PineBridge Investments 0.4% --- 61.5
Raiffeisenbank Internatio --- --- 62.0
RBC Capital Markets --- --- 62.0
RBS Securities Inc. --- --- 59.5
Scotia Capital --- --- 59.0
SMBC Nikko Securities -0.1% -3.8% 63.0
Societe Generale -0.2% --- 66.7
Standard Chartered -0.3% -4.8% 61.0
State Street Global Marke 0.1% -3.6% 60.1
Stone & McCarthy Research --- --- 62.5
TD Securities -0.5% --- 60.0
UBS -0.2% -3.9% 62.0
UniCredit Research --- -4.0% 61.0
Union Investment --- --- 61.8
University of Maryland -0.4% -4.1% 60.0
Wells Fargo & Co. --- --- 59.3
WestLB AG --- -4.9% 60.5
Westpac Banking Co. --- --- 60.5
Wrightson ICAP 0.0% --- 63.0
================================================================
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net