U.S. Mega-Banks Going Bust?
From 14 February through 20 March, five of the largest U.S. banks lost an average of 45 percent of their stock market value, reports Wall Street on Parade (WSOP):
- Bank of America: -43.6 percent
- Citigroup: -51.7 percent
- Goldman Sachs: -41.6 percent
- JP Morgan Chase: -39.3 percent
- Morgan Stanley: -46.9 percent
The combined loss totals $154.45 billion in market capitalization, leaving the five with a combined market value of $603.5 billion.
In contrast, WSOP has reviewed records of the Comptroller of the Currency, which regulates banks, and found that these same five banks hold $230 trillion in face value of derivatives – the same tricky investment bundles that brought down the economy to begin the Great Recession.
PUBLISHER’S NOTE: The difference between the banks’ disappearing market capitalization and their exposure to volatile and complex investment instruments indicates the degree to which these banks could see their value continue to plunge as the current economic crisis continues.
Already, banks across the globe are dramatically slashing jobs and closing branches. While a banking bust is imminent, as loan defaults escalate and losses mount from their trading desks, as already evidenced, central banks will do what they can to keep them floating, as they have done for decades.
Banks Down, Going Out
Businesses and industries across Europe that are suspending operations or closing down all have one thing in common: they owe money to banks.
That means the continent’s banks are likely facing incalculable losses as business and personal loan payments are missed or companies default completely.
Assessing the beginning of the “Greatest Depression,” investors are hedging against worst-case scenarios.
Banks’ cost of insuring themselves against loan losses has risen steadily in recent weeks.
Certain categories of bank bonds have lost 20 percent of their value this year and European banks’ share prices have been about halved, falling back to 1980s levels.
Barclay’s, French bank Credit Agricole, BNP Paribas, and Dutch lender ING have large portfolios of oil and gas loans, an industry on the ropes already, worsening their outlook.
Europe’s banks will release their first-quarter results next month. Those will reveal which banks face the greatest likelihood of serious trouble ahead.
Central Banks Pumping Cash
Despite the acknowledged consensus that further lowering of interest rates would not significantly boost sagging economies before the COVID-19 struck, central banks are slashing rates in hopes of pumping up failing economies.
On 19 March, the Bank of England cut its benchmark interest rate for the second time in a week, this time to 0.1 percent, and announced a £200-billion increase to its quantitative easing program, bringing the total to £654 billion.
The moves came because “U.K. and global financial conditions have tightened,” the bank said in a statement.
Taiwan’s central bank shaved 25 basis points from its interest rate, bringing it to 1.125 percent. It was the bank’s first rate reduction since June 2016. The bank also reduced its nationwide growth forecast for this year’s first two quarters to 1.07 percent and scaled back its 2020 forecast from 2.57 percent to 1.92
The Philippines’ central bank took a half-percent off its rate to bring it to 3.25 percent.
Turkey’s central bank has slashed its benchmark interest rate by 1 percentage point.
Norway’s central bank is thinking of intervening to support the krone, the national currency, after it has lost 20 percent of its value in the last two weeks.
The Swiss National Bank has chosen not to cut rates but has announced a plan to sell billions of kroner over the next few weeks to hold down the value of its currency so its exports don’t rise in price.
The U.S. Federal Reserve announced on 12 March that it would buy at least $500 billion in additional U.S. treasury bonds, then bought $275 billion of that amount in the week since.
This quick action has led market-watchers to believe the Fed will spend more than the promised $500 billion in the relatively near future.
Fed chair Jerome Powell said the bank will invest “at a strong rate that we think will restore market function, restore liquidity as quickly as it can be restored.”
PUBLISHER’S NOTE: The central banks think they’re saving their national economies from the effects of the coronavirus. Actually, the damage isn’t being done by the virus but by politicians’ overreaction to it. We don’t need to be rescued from the virus but from politicians’ decisions to shut down national industries and collapse national economies
Banks: Ease Rules. Need to Cheat
Squeezed by low or negative interest rates and the prospect of more customers defaulting on loans, banks are demanding that regulations implemented after the Great Recession – covering everything from stricter accounting rules to considering the effects of loans on climate change – be suspended or erased.
The European Central Bank, Bank of England, and bank regulators at several U.S. agencies are confronting a coordinated campaign by banks to loosen rules so that banks have flexibility to deal with fallout from the virus pandemic’s economic consequences.
A key demand is loosening a rule that banks have greater cash reserves at hand to buffer losses from loans that go bad.
The rule is especially strict in Europe, where banks argue that keeping large reserves on hand before loans even begin to become troubled will keep them from lending to viable businesses struggling through the current crisis.
Banks also are required to record some traders’ phone calls and monitor transactions to ensure compliance with regulations and ferret out money laundering. Banks argue that with staffs working at home and workers swamped by the volume of transactions, those rules should be loosened so IT departments can focus on ensuring that banks’ day-to-day operations run smoothly.
Banks are finding regulators amenable.
The Bank of England is reviewing stricter accounting rules with an eye toward suspending them temporarily; several bankers expect the European Central Bank to do the same.
German bankers have loosened capital requirements and the ECB has delayed mandatory stress tests that measure banks’ financial resiliency.
The U.S. Federal Reserve Bank has softened liquidity requirements and the Securities and Exchange Commission has eased some requirements to record traders’ calls.
Regulators and analysts generally agree that the banks need extraordinary flexibility to deal with the current crisis.
However, regulators shouldn’t completely abolish rules that “were responsible for the fact that banks have entered the coronavirus crisis in a much better position than they did the 2008 crisis,” said Sascha Steffan, a professor at the Frankfurt School of Finance and Management.
In recent weeks, premiums on banks’ insurance policies covering loan losses have spiked. At the same time, the Stoxx Europe 600 Bank Index and Dow Jones bank index have lost 40 percent in value.