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.