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Will restricted bank lending in the next years push house prices down? And by how much?

And what is the maximum annual prices fall that UK banks can withstand before going bust?

On Friday the BoE published its "Financial Stability Report". It has some serious clues about that. (Also interesting was the FSA's Financial Risk Outlook 2010 http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf )

On page 50, the report says that "UK banks currently hold enough capital to be able to sustain over £150 billion of further losses". (See full quote below.) But a few paragraphs below, it notes that bank lending will be severelly restricted in Britain. This will undoubtedly press property prices down, increasing bank losses.

Chapter 4 "The resilience of UK banks" ( Link: http://www.bankofengland.co.uk/publications/fsr/2010/fsr27sec4.pdf )

____________________________________________________________________________________________________

Quote:

"Although banks are well placed to absorb further losses…

Impairments and write-downs seem unlikely, of themselves, to threaten major UK banks’ solvency. Ignoring future profits (on the upside) and the impact of new lending and impairments (on the downside), UK banks currently hold enough capital to be able to sustain over £150 billion of further losses, while remaining above the FSA’s current 4% CT1 minimum. That compares with the £175 billion of banking book provisions and trading book write-downs over the crisis to date. Stress tests undertaken in 2008–09 subjected UK banks to a scenario with a severe and prolonged recession, high unemployment rates, and substantial house and commercial property price falls.(1) This provides some assurance that UK banks should be adequately capitalised against plausible downside risks in the current environment, although not necessarily against a conflagration of risk associated with a collapse of confidence in sovereign debt solvency around the world. More recently, the Committee of European Banking Supervisors has undertaken an EU wide macroeconomic stress-testing exercise with major EU banks. The results of this exercise will be released in July.

…replacing maturing funding remains a substantial challenge.

The December 2009 Report highlighted the refinancing challenge the major UK banks face over coming years. They are estimated to have around £480 billion of unsecured senior debt, subordinated debt, covered bonds and securitisations maturing or callable over the period to end 2012 (Chart 4.15). The withdrawal of extraordinary public support means that over the same period £165 billion of high-quality collateral supplied under the SLS will be repaid.(2) All of the £120 billion in remaining guarantees issued under the CGS will also expire, but banks have the option to roll over up to one third of their initial limit of CGS drawings (as fixed at the inception of the scheme) until April 2014.(1) This means that the major UK banks will need to refinance or replace around £750 billion to £800 billion of term funding and liquid assets by end-2012.(2) On a straight-line basis, that would imply over £25 billion would need to be raised every month for the next two and a half years. This is significantly ahead of the £12 billion average monthly public issuance so far this year, or the monthly run-rate between 2001 and 2007 (around £15 billion). UK banks are not alone in facing a significant refinancing challenge. Global banks(3) are estimated to have around US$5 trillion of medium to long-term funding maturing over the next three years, with the Italian, French and German banking systems facing large maturities relative to historic issuance (Chart 4.16). Issuance this year has been relatively lower in the United States, with banks issuing US$230 billion (61% of the required run-rate) in the first five months of 2010, than in the euro area where banks have issued US$133 billion (71% of the required run-rate) over the same period. At over US$363 billion, total issuance by US and euro-area banks dwarfs UK issuance (of around $60 billion), underlining the scale of competition for funds in global markets that banks face.

The banks are developing strategies for addressing this challenge.

The UK authorities are working with the UK banks to assess the individual and collective credibility of their strategies for meeting the refinancing challenge. And internationally they have been actively encouraging the FSB and Basel authorities to co-ordinate exchanges of information between countries. There is a risk that UK banks collectively assume strong growth in retail deposits relative to lending growth to meeting funding needs. That would rely on a higher savings ratio generating increased deposits, whereas past experience suggests that growth in lending is the main driver of higher deposits. Even when the savings ratio has risen, deposit growth has rarely exceeded loan growth. For example, following the early 1990s recession, the increase in household deposits was smaller than the increase in household loans, despite the savings ratio averaging 11% for three years (Chart 4.17). Moreover, households and companies have a choice over where to invest their savings. Recent data show that competition for retail deposits is fierce, not only among banks but from alternative instruments such as mutual funds, which have seen strong inflows in 2010 (Chart 4.18). Aggregate funding plans are also predicated on sizable asset disposals which rest on the assumption that these assets could be sold outside of the UK banking sector, to foreign banks or non-banks, if they are to reduce the UK banks’ funding burden."

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The Big Picture, Part II: Following the Worst Crisis Since the Great Depression

by Bryan Rich 06-26-10

Bryan Rich

Last week, I laid out some important historical context for establishing a solid perspective on the big picture — a broad view of where the global economy stands and what we should expect going forward.

Today, I’d like to continue with the second part of my analysis.

As I said last week, history shows us that financial crises tend to be followed by sovereign debt crises. History also shows us that sovereign debt crises tend to lead to currency crises.

I discussed the stages of a developing sovereign debt crisis — and how it’s playing out. And using history as our guide, it’s reasonable to expect a currency crisis will follow.

There were three memorable currency crises in the 1990s, all of which included a fixed exchange rate system that was under attack. But regardless of the type of currency policy (fixed or free-floating or a monetary union), a currency crisis is broadly defined as a loss of confidence in a country’s currency. Something we’ve seen very clearly in recent months with the euro.

For a reference point on how these trends unfold, there’s a good academic study from MIT on historical currency crises that lays their progression out like this …

Three Stages of a Currency Crisis

Stage #1: Loss of Confidence

The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued.

Here’s the current situation …

When the euro zone stepped in and threatened to cough up $1 trillion dollars in an attempt to save the euro monetary union, it was a conscious decision to devalue the euro.

Why did they do it?

The euro zone has committed to do whatever it takes to keep its members afloat.

The euro zone has committed to do whatever it takes to keep its members afloat.

They had no choice!

The European banking system was, and still is, too exposed to the sovereign debt of the euro zone’s weak spots. An imminent default of a euro member country would have meant a crushing blow to European banks and likely another wave of global financial crisis — this time worse.

Here’s why: Last year the European Central Bank was flooding the banking system with unlimited loans for a paltry 1 percent. What did the banks do with the money? They bought government debt — specifically, debt from the PIGS (Portugal, Ireland, Greece, Spain).

In all, European banks own $1.5 trillion worth of debt from the fiscally challenged countries of the euro zone. As a result, politicians in Europe felt they had their backs against the wall and their response was one of “all-in.”

All countries involved in the monetary union went headlong into the crisis because they had no choice. The strategy: Buy time and devalue the euro.

Stage #2: Herding

When it’s thought that investors are moving out of a currency, others follow. This is typical “herding” psychology.

Here’s the current situation …

Short positions in the euro hit an all-time high.

Short positions in the euro hit an all-time high.

Every week the Commodity Futures Trading Commission releases its Commitments of Traders (COT) report, which tracks the positioning of market participants. While it’s just an indication of how the general market is positioned, it’s a great reference point.

The recent reports provide an excellent example of this herding mentality that tends to be associated with currency crises. I’m talking specifically about the euro.

In fact, the uncertain outlook has triggered a massive wave of short positions in the euro — the largest in the currency’s 11-year history.

When the market is heavily positioned one way — and the fundamentals support it and an intentional devaluation appears underway — big institutions have to react. Put simply, they have too much to lose by getting caught the wrong way.

Given the euro is the second most widely held currency in the world, there is a lot of unloading that could take place …

For example, Iran’s central bank has announced they will be diversifying euro exposure — trading into gold and U.S. dollars. And China and the UK have shown a significant increased interest in owning U.S. dollars as opposed to euros.

Stage #3: Contagion

The next step is contagion. And contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses.

Here’s the current situation …

Dubai's debt problems were just the beginning of the global sovereign debt crisis.

Dubai’s debt problems were just the beginning of the global sovereign debt crisis.

The catalyst for sovereign debt crises: Bloated debt and deficits. And as I’ve said, sovereign debt crises tend to lead to currency crises.

You don’t have to look far to find countries that carry bloated debt loads and deficit burdens.

Over 40 percent of the world’s GDP comes from countries running deficits in excess of 10 percent of GDP — a level proven to be dangerous territory.

We’ve already seen the sovereign debt contagion. A crisis that started in Dubai now confronts Greece, Spain, Portugal … and will likely spread to the UK, Japan and even the U.S.

It’s clear there are a number of reasons why global investors could lose confidence in currencies in this global economic environment. So a contagion of currency crisis is a reasonable expectation.

The bottom line: The day-to-day ebb and flow of economic data and news can be distracting. That’s why it’s important, especially with all that is going on, to keep the big picture in perspective.

History shows us that a global recession when combined with a financial crisis tends to stifle economic activity longer than normal recessions. History also shows us that financial crises tend to lead to sovereign debt crises, which tend to lead to currency crises.

So with that in mind, it’s fair to say that a V-shaped economic recovery has always been very unlikely. What’s more likely is that we’ll see more shocks to the global economy, more challenges and more investors fleeing risky investments in favor of safe havens.

Regards,

Bryan

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The Big Picture, Part II: Following the Worst Crisis Since the Great Depression

by Bryan Rich 06-26-10

Bryan Rich

Last week, I laid out some important historical context for establishing a solid perspective on the big picture — a broad view of where the global economy stands and what we should expect going forward.

Today, I’d like to continue with the second part of my analysis.

As I said last week, history shows us that financial crises tend to be followed by sovereign debt crises. History also shows us that sovereign debt crises tend to lead to currency crises.

I discussed the stages of a developing sovereign debt crisis — and how it’s playing out. And using history as our guide, it’s reasonable to expect a currency crisis will follow.

There were three memorable currency crises in the 1990s, all of which included a fixed exchange rate system that was under attack. But regardless of the type of currency policy (fixed or free-floating or a monetary union), a currency crisis is broadly defined as a loss of confidence in a country’s currency. Something we’ve seen very clearly in recent months with the euro.

For a reference point on how these trends unfold, there’s a good academic study from MIT on historical currency crises that lays their progression out like this …

Three Stages of a Currency Crisis

Stage #1: Loss of Confidence

The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued.

Here’s the current situation …

When the euro zone stepped in and threatened to cough up $1 trillion dollars in an attempt to save the euro monetary union, it was a conscious decision to devalue the euro.

Why did they do it?

The euro zone has committed to do whatever it takes to keep its members afloat.

The euro zone has committed to do whatever it takes to keep its members afloat.

They had no choice!

The European banking system was, and still is, too exposed to the sovereign debt of the euro zone’s weak spots. An imminent default of a euro member country would have meant a crushing blow to European banks and likely another wave of global financial crisis — this time worse.

Here’s why: Last year the European Central Bank was flooding the banking system with unlimited loans for a paltry 1 percent. What did the banks do with the money? They bought government debt — specifically, debt from the PIGS (Portugal, Ireland, Greece, Spain).

In all, European banks own $1.5 trillion worth of debt from the fiscally challenged countries of the euro zone. As a result, politicians in Europe felt they had their backs against the wall and their response was one of “all-in.”

All countries involved in the monetary union went headlong into the crisis because they had no choice. The strategy: Buy time and devalue the euro.

Stage #2: Herding

When it’s thought that investors are moving out of a currency, others follow. This is typical “herding” psychology.

Here’s the current situation …

Short positions in the euro hit an all-time high.

Short positions in the euro hit an all-time high.

Every week the Commodity Futures Trading Commission releases its Commitments of Traders (COT) report, which tracks the positioning of market participants. While it’s just an indication of how the general market is positioned, it’s a great reference point.

The recent reports provide an excellent example of this herding mentality that tends to be associated with currency crises. I’m talking specifically about the euro.

In fact, the uncertain outlook has triggered a massive wave of short positions in the euro — the largest in the currency’s 11-year history.

When the market is heavily positioned one way — and the fundamentals support it and an intentional devaluation appears underway — big institutions have to react. Put simply, they have too much to lose by getting caught the wrong way.

Given the euro is the second most widely held currency in the world, there is a lot of unloading that could take place …

For example, Iran’s central bank has announced they will be diversifying euro exposure — trading into gold and U.S. dollars. And China and the UK have shown a significant increased interest in owning U.S. dollars as opposed to euros.

Stage #3: Contagion

The next step is contagion. And contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses.

Here’s the current situation …

Dubai's debt problems were just the beginning of the global sovereign debt crisis.

Dubai’s debt problems were just the beginning of the global sovereign debt crisis.

The catalyst for sovereign debt crises: Bloated debt and deficits. And as I’ve said, sovereign debt crises tend to lead to currency crises.

You don’t have to look far to find countries that carry bloated debt loads and deficit burdens.

Over 40 percent of the world’s GDP comes from countries running deficits in excess of 10 percent of GDP — a level proven to be dangerous territory.

We’ve already seen the sovereign debt contagion. A crisis that started in Dubai now confronts Greece, Spain, Portugal … and will likely spread to the UK, Japan and even the U.S.

It’s clear there are a number of reasons why global investors could lose confidence in currencies in this global economic environment. So a contagion of currency crisis is a reasonable expectation.

The bottom line: The day-to-day ebb and flow of economic data and news can be distracting. That’s why it’s important, especially with all that is going on, to keep the big picture in perspective.

History shows us that a global recession when combined with a financial crisis tends to stifle economic activity longer than normal recessions. History also shows us that financial crises tend to lead to sovereign debt crises, which tend to lead to currency crises.

So with that in mind, it’s fair to say that a V-shaped economic recovery has always been very unlikely. What’s more likely is that we’ll see more shocks to the global economy, more challenges and more investors fleeing risky investments in favor of safe havens.

Regards,

Bryan

Yes, that was interesting, thanks. I still think that we will have HP falls. The question is how fast can this fall be, before breaking the UK banks - as mortgage borrowers default. Or are UK banks more exposed to Euro sovereign debt than to UK housing markets?

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This means that the major UK banks will need to refinance or replace around £750 billion to £800 billion of term funding and liquid assets by end-2012.(2) On a straight-line basis, that would imply over £25 billion would need to be raised every month for the next two and a half years. This is significantly ahead of the £12 billion average monthly public issuance so far this year, or the monthly run-rate between 2001 and 2007 (around £15 billion)

This is the bit that really shocked me. The banks have got to raise almost twice as much each month (£25bn rather than £15bn) as they did during the boom years.

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This is the bit that really shocked me. The banks have got to raise almost twice as much each month (£25bn rather than £15bn) as they did during the boom years.

The £15bn doesn't refer to the banks. It refers to the government!

In other words, the banks need to raise money faster over the next 2 years, than Gordon Brown needed to over the previous 7.

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This is the bit that really shocked me. The banks have got to raise almost twice as much each month (£25bn rather than £15bn) as they did during the boom years.

Exactly. It did sound like a lot of money. But I don't remember the size of the mortgage market. And I don't remember how big are mortgages as a share of total banking lending, etc. In other words, I don't have numbers that would be useful to make a bridge between this BoE report, and HP forecasts.

I found today another interesting info, posted by "FreeTrader", in another thread, that is another piece for the jigsaw. How much money, capital, British households have? A lot, apparently. Looks like we are indeed a very rich country. (And this will help a recovery, as we may not owe much to foreigners.) See here:

BlueBook09Households.gif

Edited by Tired of Waiting

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The £15bn doesn't refer to the banks. It refers to the government!

In other words, the banks need to raise money faster over the next 2 years, than Gordon Brown needed to over the previous 7.

Put that way... scary.

And they need the money... to what exactly?

Did they lend long term (mortgages), but borrowed short term, from the money markets? Is that it? If so, our bubble need new, fresh lenders / supporters? Will the banks keep finding them? At what interest rates?

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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