Tuesday, December 31, 2013

The financial year in review – Q4/2013 – MBS litigation, FX manipulation, U.S. debt, Bitcoin, and FED tapering


If confirmed by the Senate I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted into the Federal Reserve.”
Janet Yellen – 10 October 2013

ECB' Vitor Constancio points out that European banks are better performers than their market valuation suggests; capital adequacy ratios are, on average, stronger than in the US. UniCredit considers a sale of its Ukrainian banking business and a purchase of Poland’s BGZ Bank. In its 2014 stress tests, EU regulators intend to penalize EU banks who continue relying on the ECB's cheap funding program LTRO. Monte Dei Paschi's board accepts a 2.5 BEUR capital increase, imposed by European regulators. If investors cannot be found, the bank's bailout bonds subscribed by Italy will have to be converted into equity. A subsidiary of Goldman Sachs, Leed International Education Group, is subject of investigations in China; authorities assume bribes paid to Lei Yi, chairman of the Chinese company Yunnan Tin. European banks' exposure to their own sovereigns, through holding government bonds, is again on the rise and reaches up to 10 % in certain European countries. JP Morgan settles CFTC's London Whale investigation for 100 MUSD. To comply with Basel III rules, BBVA raises 1 BUSD by selling 5 % of its 15 % stake in Chinese Citic Bank. JP Morgan settles its next litigation and reaches a 15 BUSD agreement with U.S. authorities about mortgage backed securities selling claims. Rabobank faces a 1 BUSD LIBOR fine by U.S., U.K., and Dutch regulators. Wells Fargo strikes a deal with the Federal Housing Finance Agency for less than 1 BUSD related to mortgage backed securities litigation.

The US Congress has fixed a deadline for extending the U.S. debt cealing for October 17, 2013. This may become the possible date for a U.S. sovereign debt default. A few days later, China and Japan criticize the USA for not dealing efficiently with its budgetary crisis, as fears about a U.S. sovereign debt default rise. Next, the U.S. senate suggest to extend the U.S. debt ceiling temporarily for further 6 weeks. The financial press outlines the dramatic consequences, that a U.S. government debt default would have on REPO markets: U.S. government bonds could become unacceptable as collateral for REPO transactions. Fitch also reacts: The rating agency puts the U.S. and its AAA rating on credit-watch negative, due to ongoing discussions about the rising of the U.S. maximum debt level. Finally, on October 17, the U.S. congress approves a deal to raise the debt ceiling of the U.S. temporarily until February 7, 2013.

Janet Yellen will become the next chairman of the U.S. Federal Reserve. The European Central Bank and the People’s Bank of China agree on a currency swap which is meant to encourage the use of the Renminbi in China/EU trade relations. Real estate bubble in Germany? The Bundesbank warns that real estate prices in big German cities could be 20 % overvalued. The ECB publishes its criteria for carrying out next year’s stress tests on the biggest European banks. The tests will be finished by November 2014. The U.S. FED leaves its monetary policy unchanged but considers a slowdown of bond repurchases in January and February 2014.

After Q3 2013, the Spanish economy puts an end to its recession.

ICE and NYSE continue their ambitions to merge. European regulators are not likely to oppose the deal. Hedge Funds appear more and more on REPO markets which are less interesting for banks, due to upcoming leverage ratio regulation. The financial press reports that private equity funds are very active in financing the shipping industry. For buying a new ship, typically 80 % of equity financing is provided by private equity funds.


If things continue to be this bad year after year, one way or another, the thing [the Eurozone] will crack.”
Paul Krugman – 22 November 2013

Barclays suspends six FX traders (including its chief currencies trader) for market manipulation. Goldman Sachs confirms being involved in FX trading probes lead by several national regulators. Barclays, UBS, Deutsche Bank, RBS, Citigroup, and JP Morgan are also affected. Commerzbank beats Q3 earnings expectations significantly. Later in November, we learn that 15 banks in total are subject to FOREX manipulation investigation. Citigroup has closed 22 branches in South Korea since the beginning of 2013. Reasons are weak loan growth, regulatory interventions, and a low interest rate environment. RBS is said to sell its structured retail investor and equity derivatives business to BNP Paribas. Crédit Suisse will ring-fence its Swiss private banking, retail, corporate, and institutional business from its global investment banking operations by creating a separate Swiss subsidiary. RBS' global restructuring unit is accused of abusing its corporate customers. The allegation is that RBS deliberately exploits temporary difficulties of otherwise strong companies to seize their profitable assets. Monte dei Paschi di Siena will approve a 3 bn € capital increase to gain approval from the European Commission for 4.1 bn € bailout bonds subscribed by the Italian Government. Deutsche Bank intends to sell its U.K. wealth management branch, Tilney Investment Management, to the private equity group Permira. UBS prohibits its traders using social chat rooms. Exceptions remain possible and single client chat rooms remain open.

Spain experiences an investment boom in the car industry. The OECD criticizes France for its lack of structural reforms to restore its competitiveness. Iran signs a deal with the U.S., Britain, France, Germany, Russia, and China to curb its nuclear program and to receive, in return, alleviation from economic sanctions.

The hedge fund SAC Capital agrees to pay a 1.8 BUSD fine for insider trading. Twitter is successfully introduced to the New York Stock Exchange. The company is valued 31.2 BUSD. The U.S. Senate holds a meeting to debate if and how to regulate Bitcoin currency. The use of covenant lite corporate loans in CLOs increases to record highs since the financial crisis. A decline of gas prices is under way. U.S. shale gas is significantly cheaper than traditional gas contracts in Europe and Asia, which are linked to the price of oil.

The ECB cuts interest rates in response to falling inflation across the Eurozone: The refinancing rate is fixed at 0.25 %, interest on reserves is 0 %, and the interest rate for ECB's regular lending facility is 0.75 %. Janet Yellen, future chairman of the FED, says that the US economy lacks behind its potential and that the FED's monetary accommodation should be used to stimulate the economy further; she confirms that an inflation target of 2 % is a top priority for the FED. Raghuram Rajan, governor of Indian's central bank RBI, intends to liberalize the Indian banking sector over the next years, opening it up to national and foreign competition. U.S. banks warn they could charge interest for client deposits if the FED still lowers interest rates received for FED deposits. Chinese regulators intend to limit interbank lending to avoid a build-up of leverage in the financial system.


Silicon Valley entrepreneurs start investing in Bitcoin exchanges, seeing in its open protocol a good opportunity to develop low-cost exchange transfer systems. Later in the month, the European Banking Authority warns about the use of unregulated Bitcoin currency exchanges that imply very high volatility of exchange rates. The Gold price falls to its lowest level since July 2013 and, on December 2, stands at 1,218 USD. New cash crunch in China: Money markets are short of cash and short-term lending rates soar from 4.3 to 7.6 %. The central bank reacts with short-term liquidity operations. It injects 4.8 bn USD in the financial system via open market transactions and succeeds to bring inter-bank lending rates down again.

Portugal prepares a bond swap; the country intends to fully return to capital markets by mid 2014. Ireland regains economic sovereignty as the country exits the phase of international bail-out. Greece and Ireland are among the best performing stock markets in 2013, with 45 % and 35 % gain in USD terms respectively.

Investment bank bonuses for 2014 are expected to decline by average 5 to 10 %. RBS' retail business experiences a technology breakdown, making it impossible for customers to use the bank’s credit and debit card payment services. Deutsche Bank, Société Générale, Citibank, and JP Morgan settle anti-trust claims in relation to EURIBOR fixing violations with the European Commission for 1.7 BEUR in total. HSBC is thinking about selling / floating its U.K. business. BaFin investigates whether Deutsche Bank has participed in a fixing of gold and silver prices. JP Morgan Chase intends to sell its Asian investment business, Global Special Opportunities Group, for 1 BUSD. The goal is to streamline the bank's operations and anticipate future financial regulation that could forbid this type of business. A few days later, JP Morgan sues the Federal Deposit Insurance Corporation and claims more than 1 BUSD on the ground that FDIC mismanaged JP Morgan's subsidiary, Washington Mutual, when the latter went into receivership. Citi sells its oil trading business to Rosneft. The Brazilian investment bank, BTG Pactual, strengthens its commodities trading business in London and intends to hire 100 additional staff.

U.S. regulators agree on the details of the Volcker rule, specifying namely the details of forbidding proprietary trading for banks. Banks react by preparing law suits against upcoming regulation. The ECB announces its intention to stricter regulate holding sovereign bonds by banks. This should create better incentives for corporate lending instead of buying sovereign debt. According to EBA data, this intention has not been successfully put in place so far: Sovereign bond holdings by European Banks increase and stand today at 66 % of sovereign bonds. In Southern European countries, this number stands significantly higher. New Foreign Bank Organization rules in the U.S. will be postponed and come into force early 2014.

The European Council approves the principals of the European Banking Union: Member states will still be allowed to to wind down or recapitalize banks outside specific European rescue funds.

The U.S. FED starts off its new tapering policy by reducing quantitative easing transactions from monthly 85 BUSD to 75 BUSD. Emerging markets are the first victims of this new policy: Debt funds investing the these countries have lost 12.4 bn USD in 2013, 9.4 bn USD of which were pulled out in relation to the FED's recent tapering decision.

Thursday, December 26, 2013

The financial year in review – Q3/2013 – Portugal, physical commodities' trading, and JP Morgan fines

We are seeing light at the end of the tunnel.”
Nikos Dendias
Greek Public Order Minister
10 July 2013


The future of RBS is in the news: Rothschild is said to advise the U.K. government on how to divide RBS into a good and a bad bank. Citigroup has sold bad quality mortgages to Fannie Mae and must pay 1 BUSD in damages. S&P downgrades Barclays, Deutsche Bank, and Crédit Suisse from A- to A. The agency's rationale is doubts about the future of the European investment banking business model. The UK Government intends to sell a 5-10 % stake in Lloyds Banking Group to retail investors from September 2013 on. JP Morgan, Wells Fargo, Citigroup, and Morgan Stanley report strong Q2 2013 results. Barclays has manipulated price building in U.S. electricity markets and must pay a 470 MUSD fine. By shrinking its balance sheet and issuing convertible bonds for 6 BEUR, Deutsche Bank intends to reduce its leverage ratio. JP Morgan considers the sale of its physical commodities trading business. The reasons are higher capital requirements and a possible FED ban for banks to hold physical commodities. Goldman Sachs' physical commodities' trading unit is criticized in the U.S. Senate for long warehousing queues which hamper the physical delivery of commodities. Queues are profitable for Goldman Sachs because rental fees keep falling during queuing. Ross Mc Ewan becomes new CEO of RBS.

Commodities Trading on the Chicago Board of Trade

The EU commission investigates against 13 banks, Markit, and ISDA, alleging a violation of EU competition rules by keeping trade exchanges out of the CDS market. On the other side of the Atlantic ocean, the FED decides to implement and even go beyond Basel III minimum rules in the US. The target date is January 2014. The financial press criticizes the draft European directive on bank recovery and resolution, saying that its bail-in scheme for private creditors can trigger the risk of bank runs. The Basel Committee on Banking Supervision says it is willing to rethink Basel III regulation because the calculation of risk-weighted assets impinges on the comparability of financial institutions. European Banking Union again: The European Commission intends to transfer substantial powers to the European resolution authority; resistance comes from Germany. U.S. senators Warren and Mc. Cain propose to separate depositary institutions and financial products which did not exist at the time of the Glass Steagall act. The FED thinks about banning banks from physical commodities trading; the reason is that holding both financial and physical business might lead to banks' dominant positions in the commodities trading business. European payment card systems could become stricter regulated in that the European Commission suggests a cap on interbank transaction handling fees and a separation of entities which run payment card schemes from entities that process transactions.

Struck by a political crisis (Two ministers have resigned.), Portugal’s government bonds raise by 130 bps and reach, later in July, almost 8 %. This, however, does not lead to contagion in financial markets. In ongoing restructuring negotiations, Greece has reached an agreement with its troika lenders (i.e. European Commission, European Central Bank, and International Monetary Fund). Positive news comes from Latvia: The country is admitted to the Eurozone and will join the European currency within two years. Due to a slowdown of economic activity in emerging markets, the IMF reduces its forecast for global growth and expects 3.1 % in 2013 and 3.8 % in 2014.

Thomson Reuters will stop providing a service to high frequency trading companies to receive financial data two seconds prior to other clients against payment of an undisclosed extra fee. NYSE Euronext could take over the administration of LIBOR benchmark rates. The U.S. government sues hedge fund SAP and claims 10 BUSD damages for insider trading.

Ben Bernanke says the FED's accommodative policy will remain in place for a foreseeable future. Later on in July, the FED gets more concrete and outlines that it will not change its accommodative monetary policy until the unemployment rate in the U.S. is below 6.5 %.



Sometimes you might be tempted to give someone the benefit of the doubt or not. When the company's reputation is flying high, you tend to give them the benefit of the doubt. When the company has been dragged through a lot of scrutiny, not so much.”
Donald Langevoort – Georgetown University - 19 August 2013

EBA calls for aligning supervisory differences in Europe. The administration finds that such differences are responsible for multiple risk-weighted asset calculation by European banks. Raghuram Rajan will become new governor of the Reserve Bank of India in September 2013; he will have to deal with India's slowing growth and the Rupee's devaluation. The U.S. Treasury's bail-out of Freddie Mac will probably become profitable by the end of 2013. The Financial Stability Board intends to regulate shadow banks stronger.

Crédit Agricole and Commerzbank post better than expected Q2 2013 results. Barclays envisages selling its retail business in the United Arab Emirates. Two investigations shake up JP Morgan in August: The U.S. SEC investigates whether the bank has hired sons and daughters of Chinese government officials to facilitate its business in China. Later in the month, U.S. prosecutors want to know whether the firm has manipulated U.S. energy markets. Wells Fargo intends to cut 2,300 jobs in its mortgage business unit, due to a drop in demand for new mortgages. The U.K. Parliamentary Commission on Banking Standards urges a break-up of RBS into a good bank / bad bank structure. JP Morgan again: The firm looses 50 MUSD in a lawsuit against investor Len Blavtnik; in addition, the U.S. government demands more than 6 BUSD damages from the bank for mis-selling of mortgage-backed securities. Ecobank's board is accused of selling assets, writing off debt, and inflating bonus payments to the detriment of shareholders. KKR announces the creation of a non-banking unit (Maritime Finance Company) to finance offshore oilfield services and traditional shipping companies.

Brazil calls for a review of the IMF program for the benefit of southern European countries (namely Greece), questioning whether bail-outs are economically viable. Banks with huge business in Asia experience bad results in the region, linked to the decline of credit markets and the slowdown of the Asian economy.


In order to achieve fiscal consolidation, we have to overcome inflation first and revitalize the economy. Otherwise, we cannot see the increase in tax revenues.”
Shinzo Abe
Japanese Prime Minister
27 September 2013

Italy introduces a high frequency trading tax. Intermediaries such as market makers are exempt from the tax. Borrowing costs for Spanish and Italian SMEs fall to a two year low (5.46 % and 5.25 % respectively for 1 MEUR with 5 years maturity). The new head of India's RBI, Raghuran Rajan, intends to focus on the liberalization of the Indian banking sector. Lawrence Summers withdraws as candidate for the FED chairman position. The U.S. FED declares it will not start exiting its loose monetary policy yet, as the growth outlook for the U.S. economy for 2013 is negative. Mario Draghi, ECB President, says that the ECB will inject further liquidity into European banks to stimulate the economy William Dudley, President of the New York FED says the economic situation in the U.S. is too weak to justify an exit of the FED from stimulating monetary policies.

GE Capital intends to divest its consumer finance arm and, ultimately, to focus on commercial lending. Lloyd's chairman, John Nelson, warns about systemic risk in the insurance industry, due to too much capital flow into the insurance industry, leading to (artificially) lower pricing of insurance products. Crédit Suisse's CEO, Brady Dougan, targets an after tax ROE between 10 % (in bad times) and 20 % (in good times). A German court attests Deutsche Bank has wrongfully dismissed four traders who submitted Euribor quotes. The court says DB's internal Chinese walls were insufficient. JP Morgan intends to simplify its business structure including selling its physical commodities business, stop selling student loans, sell its private equity arm, and review its correspondent banking business. Moreover, the bank will face regulatory actions in connection with its 6 BUSD derivatives loss early 2013. The bank is accused of improper information of regulators. Finally, JP Morgan reaches an arrangement with the U.K. FCA and settles allegations over the London Whale derivative debacle. Citi will cut 1,000 jobs in its mortgage business unit, due to lower volumes of refinancing in times of increasing interest rates. Rabobank is about to settle LIBOR related charges with U.K., U.S., and Dutch regulators. Enrico Cucchiani steps down as CEO of Intesa Sanpaolo. The reason is disagreement with shareholders about the disappointing performance of the bank in Q2 2013.

The Financial Stability Board calls for banking regulation on a bail-in of bondholders of failing financial institutions. According to the European Banking Authority, Europe’s 42 biggest banks will meet Basel III requirements within the following 6 months, five years ahead of schedule. CLO issues are at the highest level since the financial crisis: 55.41 BUSD in 2013 so far as opposed to 88.94 in total 2007.

Sunday, December 22, 2013

The financial year in review – Q2/2013 – Gold, FED, and Chinese inter-bank lending rates

There was no hiding, there was no lying, there was not bullshitting. Period.”
Jamie Dimon, CEO of JP Morgan Chase, on 11 June 2013, about the London Whale derivatives loss affair


On financial markets, the Bitcoin virtual currency bubble grows and the gold price falls significantly; other commodities (including WTI and Crude Oil) follow.

In the Eurozone, financial fragmentation is gaining place: Southern SMEs pay significantly higher financing costs than their Northern peers; the spread is around 3-4 %. The ECB leaves interest rates stable at 0.75 % but signals a willingness to lower the rate, given current inflation below 2 % and high unemployment. Portugal faces political problems: Its constitutional courts rejects austerity measures necessary for the country to meet deficit-reduction targets. As a consequence, the country's next 2 bn Euro installment of its 78 bn Euro bailout facility will be postponed. Ireland obtains longer repayment periods for paying back the its bailout loans. Greece is on track for meeting financial targets of its bailout line and will receive the next tranche payment on time. Finally, Fitch downgrades the UK to AA+.

Bankers' bonuses are again in the financial news: London fears it could loose attractiveness for foreign banks due to stricter bonus restrictions in Europe. Commerzbank looses a legal battle before the U.K. Court of appeal and must pay 50 MEUR bonuses to 104 bankers related to their 2008 (good or bad?) performance.

Positive news comes from the U.S. banking industry, where JP Morgan, Goldman Sachs, and Citi beat analyst Q1 earnings expectations.

On the regulatory side, banks lobby for carving out trade finance from new Basel III rules. They argue that trade finance carries very low risk and default rates. The U.S. FED suggests leverage standards above the minimum 3 % suggested by Basel III regulation.

Any litigation or bank scandal in April? Yes, the German Bundesbank investigates against Deutsche Bank; the institution could have hidden credit derivatives' losses during the financial crisis. RBS is sued by shareholders who have lost money in a rights' issue in 2008. They complain about untrue and hidden material information in the bank's prospectuses.

In Asia, China's president Xi Jingping promises to ameliorate the business conditions for foreign companies operating in China. At the same time, Fitch downgrades China from AA- to A+.

The IMF starts off the tapering debate as the fund warns that extraordinarily loose monetary policies might create the next credit bubble.


Federal Reserve Building

Portugal plans austerity measures; the Government intends to cut government spending by 6 bn Euro over the next four years. Fitch upgrades Greece from CCC to B- and Greek 10Y government bonds fall by 1 % to 8.2 %. The EU stability and growth pact is in the news, because France, Spain, and Netherlands will be allowed to disrespect the 3 % budget deficit rule. The WTO announces that Brazilian Roberto Azevedo will become its new head.

In the banking sector, Santander thinks about floating its auto loan subsidiary Santander Consumer USA. Negative news comes from Germany: Commerzbank posts a 94 MEUR net loss in Q1 2013 and the financial regulator BaFin announces that German banks are, at the end of 2012, 14 BEUR short of Basel III capital. Barclays is said having paid bribes to a member of the Saudi royal family to obtain a banking license in Saudi Arabia. JP Morgan stakeholders discuss whether Jamie Dimon should continue combining the CEO and Chairman role. To make a long story short: Yes, he should and will! The Bank of Spain asks Spanish banks to further write down their loan portfolios with regard to Spanish borrowers. Later in May, Spanish banks report 10 BUSD additional bad loan provisions. They promise to stop their "extend and pretend" practice (a nice expression to describe too low provisions...).

JP Morgan and Goldman Sachs complain about how Bloomberg uses the data generated by their employees using Bloomberg text messaging services.

Another hot topic in May is international taxation rules. Luxembourg blocks an update of the EU saving directive about EU tax sharing rules. The EU opens negotiations of a tax treaty with Switzerland: Core of the negotiations will be automatic exchange of information. The EU proposes a bonus cap regulation: Without shareholder approval, bonus payment should only be possible up to twice the fixed salary.

On financial markets, FOREX revenues for investment banks are down, due to fierce competition. A senior BNP trader leaves the company after causing a loss of 10-25 MUSD. Finally, LIBOR will probably be replaced in 2014 by a dual-track system, based on survey-based lending rates and transaction-linked indices. The NYSE experiences a flash crash on May 17, as Anadarko Petroleum stock moves from 90 USD to 1 cent within the blink of an eye.

In the lending market, covenant lite loans to highly indebted companies have increased to more than 50 % of total leveraged debt, as investors search for higher returns.

The most important news this month comes from the U.S. FED; it announces the beginning of the end of its bond repurchase programs.


UBS is under investigation in France for having solicited clients to evade taxes. HSBC faces a civil lawsuit in the US for having violated a law providing for negotiating with mortgage home-owners to avoid foreclosure. BNP Paribas plans merging its US retail subsidiary Bank West with its U.S. CIB business to improve its capital and funding efficiency in the US and to counter upcoming regulatory reforms ins the U.S. Jamie Dimon comments on the London Whale scandal: “There was no hiding, there was no lying, there was not bullshitting. Period.” Stephen Hester announces his resignation as CEO of Royal Bank of Scotland and a further 2,000 headcount cut in the investment banking unit. Co-operative bank outlines its restructuring plan that includes of a 1.3 bn Sterling debt bail-in of junior bondholders. In France, UBS must pay a 10 MEUR fine for violation of money laundering regulation. Finally, European banks’ senior debt issues are at lowest levels since 10 years, due to investors’ fears about regulatory bail-in schemes.

On financial markets, U.S. hedge funds consider leaving the EU as a result of the upcoming AIFM directive. Securitization of car loans slumps in the U.S, because Lenders find other cheap refinancing sources such as customer deposits or secured borrowing. Due to a crisis in the government's coalition, Greek government bond yields rise sharply (75 bps). Finally, Italy faces a potential loss of 8 bn Euro on its interest rate derivatives portfolio and has launched an investigation, including the banks which have sold such derivatives.

The IMF says the first 110 BEUR Greek bailout was based on too optimistic growth assumptions. The fund considers that an upfront debt restructuring could have been a better option. The G8 debates the three t's – trade, tax, and transparency.

The European Commission plans to terminate self-regulation of LIBOR and to put the inter-bank rates under the administration of Paris-based ESMA. ECB's outright market transactions (OMT) are subject to a court hearing in Germany's constitutional court. Cyprus president Nicos Anastasiated wants to overhaul the country's bail-out package, saying that it harms the economy too much.

Eurozone's finance ministers come a step closer to the European banking union as they agree that the EU ESM will have the right to invest in struggling banks, if the member state in question also makes a capital investment. Later in June, EU finance ministers cannot agree on how much flexibility member states should have when avoiding own domestic banks' failures.

Central banks play a major role in June: Ben Bernanke announces the end of the FED's quantitative easing program for mid 2014, when unemployment will be at 7 %. In Europe, Mario Draghi says an exist of the ECB from the exceptional monetary policy measures remains distant. Credit crunch in China! The Chinese central bank first refuses to pump liquidity into the system to address long-term overheating of the financial system. A few days later, it makes a u-turn and says that it will support Chinese banks with liquidity if need be.

Tuesday, December 17, 2013

The financial year in review – Q1/2013 – Montei dei Paschi di Siena, EURIBOR / LIBOR, and Cyprus

The year 2013 is almost over. Time to remind you what has happened over the last 12 months! Here is Q1:


In the U.S., Wells Fargo posts strong 2012 results. The bank holds now 40 % of U.S. mortgage loans which leads to discussions about concentration in the sector. Morgan Stanley announces a 1,600 job cut in its U.S. CIB.

In the technology industry, the Dell story starts off with rumors that the company be delisted.

The European banking industry is in rather positive mood: Strong European Banks are said to repay the ECB LTRO facility and the first high yield CLO since 2008 reappear on the continent.

The rate fixing scandal continues as Raiffeisen Bank leaves the Euribor panel. Barclays communicates strongly on a cultural change in the firm. Unfortunately, the management is not lucky. Just a few days later, we learn about investigations into a sort of lending swap between Barclays and Qatar during the financial crisis to avoid a government bail-out. Deutsche Bank is criticized for showing the worst capital ratios in the industry. Finally, Italy sees yet another derivatives trading scandal, as Monte dei Paschi reveals a 720 MEUR derivatives trading loss.

On a macro-economic level, Spain reports positive news: Exports and current account rise and bond yields decline. However, unemployment remains a problem. Economists expect 25 % in 2013.

In European politics, people discuss the European Banking Union, especially the question whether the European Stability Mechanism should be allowed to invest in troubled banks' capital.

In Japan, the Government decides to boost its currency. The financial press starts talking about currency wars.


Bonus payments are a hot topic in February. Overall, European CIB cut bonus payments by 20 %. Barclays even exercizes clawback provisions for bonuses in the amount of 300 M Sterling.

On the regulatory side, the U.K. introduces a banking reform bill in parliament, European EMIR legislation enters into force, and Europe reaches a basic agreement on introducing Basel III rules.

On the LIBOR / EURIBOR front, RBS settles with U.K. and U.S. authorities for 390 MEUR. In addition, the European Commission says that it qualifies banks' LIBOR / EURIBOR violation as anti-competitive cartel behavior; a maximum penalty of 10 % of annual turnover per violation is possible.

Still in the litigation field, the U.S. department of Justice introduces a 500 MUSD lawsuit against S&P, on the grounds of its ratings of sub-prime mortgages.

In the banking sector, Barclays intends to cut 2 BUSD costs and 2,000 jobs. UBS announces to cut its fixed income trading business. Natixis restructures and will pay capital back to shareholders. Finally, Spain's Bankia reports a 19 bn Euro loss for FY 2012.

In the sovereign area, the G7 warns about currency wars and the G20 says that currencies should not be a tool for competitive devaluation; exchange rates should be determined by market fundamentals. The EU and the U.S. intend to negotiate a bilateral trade agreement within the next two years.

European periphery countries are still in the news: Rumors spread that Greek banks might be nationalized as investors are not willing to increase their equity stake. In Cyprus, banks are in difficulties. A bail-in of depositors and debtholders is suggested and criticized for the inherent risk of contagion. In Spain, however, structural reforms succeed, as Spanish labor markets are getting more competitive.

More in the core of Europe, Moody's downgrades the UK from AAA to Aa1. Main criteria are the high debt / GDP ratio and the (in)ability to absorb shocks to the economy such as major financial crisis. To create incentives for banks to invest in the real economy, the UK central bank thinks about introducing negative interest for bank deposits with the central bank.

Worrying news comes also from the U.S.: The FED announces “fears of not being able to pay interest on banks' deposits”.



Cyprus, Cyprus, and again Cyprus.

The European bailout for Cyprus includes first a 6.75 % levy on deposits below 100,000 € and 9.9 % levy on deposits beyond 100,000 €. Some people warn about the risk of bank runs and the insecurity of deposits in Europe. Cyprus wants to renegotiate bailout terms and banks stay closed in the country.

The next bail-out terms amount to 10 bn Euro. Funds of the European Stability Mechanism shall not be mobilized. These terms are again rejected by Cyprus which calls Russia for help. Russia is willing to invest in Cypriot banks, but only on commercially viable terms. Cyprus' banks remain closed.

Next, Cyprus proposes to tax only deposits beyond 100,000 € and to break up its banks in good banks (deposits below 100,000 €) and bad banks (deposits beyond 100,000 €). This proposal is, in essence, adopted in the 10 BEUR bail-out that is agreed by the end of the month. Laiki bank will be closed and its deposits over 100,000 will be put in a bad bank. Bank of Cyprus' deposits beyond 100,000 € will also be frozen. Other banks not affected by the bail-out.

After the Cyprus bail-out and its negative signs for safety of bank deposits in Europe, shares of European banks loose heavily.

News from other Southern European countries are also bad: Greece misses revenue targets, namely due to tax evasion. Later in the month FMI, EU, and ECB teams leave Greece because they cannot agree on government budget reductions with the country. France announces officially that it will not meet its 3 % budget deficit target promised to the European Union and probably report a 3.7 % budget deficit for 2013.

Germany prepares a balanced budget. The Polish government wants to organize a referendum on joining the Euro despite currently 62 % of the population being against joining the Euro.

Outside Europe, China and Brazil enter intro a 30 bn USD currency swap agreement to ensure the import / export relationship independent from financial markets' conditions. The Swap represents eight months of exports from Brazil to China and ten months of exports from China to Brazil. Finally, Japan's Central bank governer Kuroda warns that the country's debt level (245 % on GDP) in not sustainable.

London banks are thinking about suing the European Union for fixing bonus caps. In the U.S. stress tests for banks have a positive outcome. RBS has a bad month of March: Mervyn King recommends a simple break up of the bank because no private investor is interested to buy the bank as a whole. Barclays' CEO Antony Jenkins talks about cutting costs and bringing staff from 140,000 to 100,000 over the next 10 years. Commerzbank is likely to sell its Eurohypo real estate business in the UK to private equity investors.

In banking litigation, Citi agrees on a 730 MUSD sub-prime settlement with investors and Deutsche Bank reveals 600 MEUR extra legal provisions for mortgage-related litigation in the US. Later in the month, Deutsche adds another 500 MEUR provision for future settlements in the LIBOR rates setting scandal.