…and why RBS is a basket-case
By John Ward: US
Fed Reserve vice chairman Tom Hoenig (below) is still worried about
taxpayers’ exposure to the banks’ risky positions, he told Fortune
Magazine recently. Poor old Tom is behind the music here, for shurely
any foole know that it is the creditors, not the taxpayers, who will
cough up this time. On the other hand, maybe Tom has spotted that
they’re the same people, and simply can’t be bothered to go along with
the robotic Newspeak.
Some tentative steps have been taken to make banks safer since 2008 –
increasing the leverage ratio from 3% to 5% for bank holding companies,
and 6% for banks – but these are slim streams of urine to fire at the
approaching tidal wave…and even those have been fought tooth and nail by
the frontal lobe tendency. Hoenig points out with refreshing honesty
that the difference between collateralised debt obligations that got
banks into a pickle during the 2008 crisis, and the collateralised loan
obligations they now have on their books, are little more than cosmetic.
Similarly, the book ‘value’ of derivatives is more silly that it was
before the Crunch. And of course, when it comes to the loan portfolio,
every last one of the beggars is leveraged like a Geithner bazooka gone
nuclear.
One of the problems is that banks can show what look like healthy
asset-to-capital ratios, but by no means all those assets are loans…and
not all loans are equally secure. The best way to look
at this is the capital (or deposits for some mutuals) to loans ratio…
usually expressed as a capital adequacy level of equity that must be
held as a percentage of risk weighted assets. Goldman Sachs, for
example, has a 14.2% capital to risk level. Put another way, it would
take just one seventh of Goldman’s loans to go bad, and they’d be wiped
out.
Across Asia, the following levels leap out from the columns: 15.8%, 15.3%, 13.5%, 12.7%, 14.2%, 15.7%.
So pretty much of a muchness – ie, in the current climate, nowhere near
enough. In China itself, the central bank stands at 12.04%, ICBC is at
14%.
In banking circles, these % ratios are all regarded as “more than
enough” to cope. But that’s bollocks. Not that I’m suggesting they
should be the marker, but Islamic Bank ratios range from 43-65% CTR. It
could be because the penalty for Islamic bankers going bust is stoning
or something, but the truth is, it’s a culturo-religious thing: it is a
serious sin to profiteer from another, and socially a massive disgrace
to leave investors – sorry, creditors – in the lurch. Cultural or not,
Islamics don’t set those levels for fun: they do it based on calculated
risk.
The trouble with secular banking is not calculated risk – it’s incalculable risk. And the biggest single reason remains exactly the same: derivative commitments.
In that general context, I’m staggered as to why people still wonder
why I guffaw so much about an RBS “returning to health”. Here’s why. In
the latest available TWST analysis of Royal Bank of Scotland, the following can be read (my emphases):
‘A key part of the restructuring
programme announced in February 2009 was to run down and sell the RBS
Group’s non-core assets and businesses with a continued review of the
RBS Group’s portfolio to identify further disposals of certain non-core
assets and businesses. Assets identified for this purpose and allocated
to the RBS Group’s Non-Core division totalled £258 billion, excluding derivatives, at 31 December 2008. By 31 December 2013, this total had reduced to £28.0 billion (31 December 2012 – £57.4 billion), excluding derivatives, as further progress was made in business disposals and portfolio sales during the course of 2013′.
The Osborne strategy is to dump all RBS’s investment side and return
it to retail status – hence the need to get rid of Hester, who remained
obdurate on the need to retain a strong investment side. But either way,
the same basic fact is inescapable: everyone’s ignoring the elephant in
the corner with body odour issues. Wall Street insists that all
derivatives are netted, which is an impossible thing for anyone to know.
And you will look in vain for any estimate of derivatives exposure in
the RBS Annual Report.
What the TWST report will give you, however, is a horrific list of
all the things that make shares in RBS a high-risk investment…and the
sting is in the highlighted tail:
‘…. loss resulting from inadequate
or failed internal processes, people and systems, or from external
events. The RBS Group has complex and geographically diverse operations
and operational risk and losses can result from internal and external
fraud, errors by employees or third parties, failure to document
transactions properly or to obtain proper authorisation, failure to
comply with applicable regulatory requirements and conduct of business
rules (including those arising out of anti-bribery, anti-money
laundering and anti-terrorism legislation….In addition, certain
competitors may have stronger and more efficient operations, including
better IT systems allowing them to implement innovative technologies for
delivering services to their customers, and may have access to lower
cost funding and/or be able to attract deposits on more favourable terms
than the RBS Group…The RBS Group has significant exposure to a
weakening of the nascent economic recovery in Europe…The RBS Group has
significant exposure to private sector and public sector customers and
counterparties in the eurozone (at 31 December 2013 principally Ireland
(£39.8 billion), Germany (£31.1 billion), The Netherlands (£25.9
billion), France (£23.8 billion), Spain (£11.2 billion) and Italy (£7.1
billion)…The November 2013 [Basel
stress test] update placed the RBS Group in the second from bottom
bucket, subjecting it to more intensive oversight and supervision and
requiring to have additional loss absorption capacity of 1.5% in CET1 to
be phased in from the beginning of 2016.’
So that’s all OK, then. Nothing to see here, because, um, we’ve hidden it. Move along now please.
Yesterday I posted
about the fear surrounding Credit Suisse’s guilty plea – how the
authorities openly admit that they had to weigh CS’s obvious, profound
and longstanding guilt against the ramifications of its potential
collapse in a Lehman moment. In 2007, I blogged at length about Lehman’s
overdependence on high-risk investment, one reward for which was the
threat of a writ from its lawyers. It’s CTR ratio then was 14.8%. It
went under within a year.
For five years or more now, we have all been using the dominoes
analogy. Today, it’s too obvious and nowhere near urgent enough as a
warning. The globally interlinked property balsa-wood, banking risk pack
of cards, business stimulation straw, sovereign bond paper and leaking
derivative petrol can are all in one small room. The situation is so
dangerous, there isn’t even room for the elephant. One spark and that’ll
be it.
No comments:
Post a Comment