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VeryMeanReversion

More On Bank Funding Troubles

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This is my favourite subject at the moment so I'm going to prattle on for a bit.

The banks have to deal with the end of SLS/CLG and rollover their existing committments. This is nearly a £trillion of the next 2-3 years.

Without mortgage interest rates rising well above gilt rates, my guess is that net lending has to be negative to the tune of £20 billion a month to cover this. That means minimal new mortgages, collecting repayments but not issuing new loans in general, then repossessing to get capital back where the small print allows (arrears or LTV violations).

This looks worse than the first credit crunch to me.

Or should I not be concerned and the wholesale market will cough up best part of a £trillion to back UK mortgages?

From http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/06/the_risks_of_forcing_banks_off.html

In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme.

And over the same timescale, British banks will have to find £120bn to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme (there is an option to roll over a third of these government guarantees to 2014).

Now as bad luck would have it, this schedule for repaying the Bank of England and the Treasury coincides with a spike in repayments on other substantial debts of British banks, in the form of bonds and residential mortgage-backed securities.

What this means, according to the Bank of England, is that banks need to refinance or replace up to £800bn of term funding and liquid assets over the coming 30 months.

The Bank of England estimates that simply to replace this finance, British banks need to sell about £25bn of new bonds and asset-backed securities every month.

Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7. And banks are currently issuing (selling) less than half the debt that's needed.

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This is my favourite subject at the moment so I'm going to prattle on for a bit.

The banks have to deal with the end of SLS/CLG and rollover their existing committments. This is nearly a £trillion of the next 2-3 years.

won't the BoE simply extend the support and restart QE? If they don't the banking system is surely bust.

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won't the BoE simply extend the support and restart QE? If they don't the banking system is surely bust.

Even the ECB has been withdrawing support from its banks.

Governments dont want long-term debt on their balance sheet any more as it makes them look like Greece and puts their own funding at risk.

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won't the BoE simply extend the support and restart QE? If they don't the banking system is surely bust.

If they do this, it will be ratings downgrades and then the cost of debt finance will be so high we are bust. In fact, come what may we are bust. It's just that no one has quite found a way to announce it yet. Really there is no way out. The only conceivable way forward is the massive cuts of £113BN announced by Osborne. Doubtful he can keep to them or that any of his targets for the income side of his equation will actually be met. At least we can allow devaluation and print some money, so we're better placed than the Eurozone - until they dump that dangerous Euro that is!

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This is my favourite subject at the moment so I'm going to prattle on for a bit.

Prattle away. I think that it's one of the most important factors which will decide what happens in the next few years.

FWIW, I've emailed my MP 3 times since the election, 2 of which he's replied to. The 3rd, asking what the government plans for SLS/CLG, he has ignored (twice, in fact, if you include my similar election question),

Peter.

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I think the best option is mass liquidation of assets. Ie. Mass repossessions.

I think the banks will come to that conclusion, what other options do they actually have?.

With long term gilts at around 3.5 to 4%, I would have the market price for wholesale mortgage funding would be 4.5 to 5% and subsequent mortgage rates to be aroud 6-7% for low LTVs. It's only government distortion for mortgage funding that is keeping these rates down.

With the nasty party back in charge and still nearly 5 years in power, the banks will be under less pressure to be forgiving.

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I think the banks will come to that conclusion, what other options do they actually have?.

With long term gilts at around 3.5 to 4%, I would have the market price for wholesale mortgage funding would be 4.5 to 5% and subsequent mortgage rates to be aroud 6-7% for low LTVs. It's only government distortion for mortgage funding that is keeping these rates down.

With the nasty party back in charge and still nearly 5 years in power, the banks will be under less pressure to be forgiving.

Isnt libor similar to base rate or even lower? Only the weak need to boe. Which of course is nearly all of them.

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If they do this, it will be ratings downgrades

Easily solved.

Issue QEII funny money and buy Fitch, Moody's (market cap USD4.62B) and S&P.

Should not cost more than USD15B between them.

Ratings problem gone forever! :P

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This is my favourite subject at the moment so I'm going to prattle on for a bit.

It's mine too, as surely continued and indeed worsening lack of funding is the key to HPC

The only problem I see is that the BoE have already brought in a "permanent successor" to the SLS called the Discount Window Facility, where it seems lenders can borrow for a year at a time on a very similar basis to the SLS.

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I think the best option is mass liquidation of assets. Ie. Mass repossessions.

But if they do repossess the prices of commercial property and residential property wil plumet.

The banks will no longer be able to pretend they are at the values when loans were taken out.

It seems to be policy to stop this happening at any cost. (mind boggling cost).

There doesn't seem any way out.

Yet still there are people prepared to believe that GDP will rise significantly enough to overcome the loss due to goverment spending. And that increasing unemployment will be halted by the expanding private sector.

I see the banking system going the way of British Steel, British Leyland, The National Coalboard.

The banks are now another great nationalised institution and no matter how hard any government tries, their interference will only make matters worse.

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It's mine too, as surely continued and indeed worsening lack of funding is the key to HPC

The only problem I see is that the BoE have already brought in a "permanent successor" to the SLS called the Discount Window Facility, where it seems lenders can borrow for a year at a time on a very similar basis to the SLS.

Ahh..blast thats what I thought would happen, the banks pay the govt and then the govt coughs up again .....strictly for the short term you understand....rinse and repeat.

And I have read various things of late on mortgage rates reducing. Nationwide the latest case 0.29% off for most borrowers ?

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I thought the discount window was something you went to when you were in trouble? Wasn't that what Northern Rock had to tap?

I posted on another thread I thought the government would just extend the scheme. One of the problems with that is that not only does the Special liquidity supposedly have to come out, they also need more money if future don't they? So even if we get an extension of the scheme, banks are needing more cash to continue putting out the reduced amount of mortgages they are issuing now.

So can they extend the scheme? The bond market was supposed to have thrown a wobbly and stopped buying our debt long ago. But now our gilts are a 'safe haven'. They haven't even said they aren't going to do anymore QE yet.

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Ahh..blast thats what I thought would happen, the banks pay the govt and then the govt coughs up again .....strictly for the short term you understand....rinse and repeat.

And I have read various things of late on mortgage rates reducing. Nationwide the latest case 0.29% off for most borrowers ?

Box F: DWF loan portfolio haircut ranges

• UK residential mortgages: 25%–50% haircut

• UK consumer loans: 35%–60% haircut

• UK corporate loans: 35%–60% haircut

• UK commercial real estate: 30%–60% haircut

Yep, keep using the DWF, oh yeah and then there's

For example, as described previously the Bank would require

that all loan portfolios (pre-positioned and drawn) contain no

loans that are in arrears and hence would require the

substitution or removal of non-performing loans.

Link to DWF PDF from March 2010

Edited by REP013

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I thought the discount window was something you went to when you were in trouble? Wasn't that what Northern Rock had to tap?

I posted on another thread I thought the government would just extend the scheme. One of the problems with that is that not only does the Special liquidity supposedly have to come out, they also need more money if future don't they? So even if we get an extension of the scheme, banks are needing more cash to continue putting out the reduced amount of mortgages they are issuing now.

So can they extend the scheme? The bond market was supposed to have thrown a wobbly and stopped buying our debt long ago. But now our gilts are a 'safe haven'. They haven't even said they aren't going to do anymore QE yet.

iirc by extending the scheme the "debts" become on balance and part of national debt where as the DWF is different.

DWF can be used anytime but ONLY by institutions deemed viable (according to the PDF)

Take a look - HERE

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Box F: DWF loan portfolio haircut ranges

• UK residential mortgages: 25%–50% haircut

• UK consumer loans: 35%–60% haircut

• UK corporate loans: 35%–60% haircut

• UK commercial real estate: 30%–60% haircut

Yep, keep using the DWF, oh yeah and then there's

For example, as described previously the Bank would require

that all loan portfolios (pre-positioned and drawn) contain no

loans that are in arrears and hence would require the

substitution or removal of non-performing loans.

Link to DWF PDF from March 2010

I'd really like to know more about the DWF because when it was revamped and extended (in Janaury 2009 I tihnk) it was touted as the "permanent successor" to the SLS

aren't the banks already taking a huge haircut on the SLS? I think they handed over something like £280bn of assets to get £190bn of gilts. So haircuts of the levels proposed don't seem to be putting them off.

EDIT found it

Treasury Bills with a face value of approximately £185bn have been lent under the Scheme. Since April 2008, the number of banks and building societies accessing the Scheme was 32. In aggregate, those firms account for over 80% of the sterling balance sheet of the financial institutions eligible to use the scheme.

The total nominal value of securities held by the Bank as collateral in the Scheme amounts to approximately £287bn. The Bank’s valuation of those securities as at 30 January 2009 was approximately £242bn, an effective discount to par of about 16%.

Edited by oldsport

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I'd really like to know more about the DWF because when it was revamped and extended (in Janaury 2009 I tihnk) it was touted as the "permanent successor" to the SLS

aren't the banks already taking a huge haircut on the SLS? I think they handed over something like £280bn of assets to get £190bn of gilts. So haircuts of the levels proposed don't seem to be putting them off.

EDIT found it

Follow the link in post 20.

It's not just the haircut ... the loans are not allowed to contain arrears. When all the "good" assets are gone what are banks left with - another 365 day roll-over (assuming the existing collateral doesn't contain any arrears)? Lending ability is being squeezed, printy, printy we hear them cry!

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I'd really like to know more about the DWF because when it was revamped and extended (in Janaury 2009 I tihnk) it was touted as the "permanent successor" to the SLS

aren't the banks already taking a huge haircut on the SLS? I think they handed over something like £280bn of assets to get £190bn of gilts. So haircuts of the levels proposed don't seem to be putting them off.

EDIT found it

The smallest haircut is mortgages, doesn't this make them the preferred method of lending money? They are better off lending money against houses than to business?

Edited by ArthurHon

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It's mine too, as surely continued and indeed worsening lack of funding is the key to HPC

The only problem I see is that the BoE have already brought in a "permanent successor" to the SLS called the Discount Window Facility, where it seems lenders can borrow for a year at a time on a very similar basis to the SLS.

Interesting OS. But how will the BoE finance this? Surely this would lead to more QE and the sovereign rating downgrade/higher interest crisis?

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I think the banks will come to that conclusion, what other options do they actually have?.

With long term gilts at around 3.5 to 4%, I would have the market price for wholesale mortgage funding would be 4.5 to 5% and subsequent mortgage rates to be aroud 6-7% for low LTVs. It's only government distortion for mortgage funding that is keeping these rates down.

With the nasty party back in charge and still nearly 5 years in power, the banks will be under less pressure to be forgiving.

As will the government with the banks. I suspect that banks getting into trouble from now on will not be given the Gordon Brown treatment. I don't know how "nasty" the government will actually be, but I suspect there will be no Applegarths or Fred the Shred payouts this time.

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Interesting OS. But how will the BoE finance this? Surely this would lead to more QE and the sovereign rating downgrade/higher interest crisis?

Yes. This is the difficulty.

When the banks were first bailed out I did not understand how the national debt did not increase.

We were all assured it did not count as debt because it was only temporary (1 year).

Suprisingly the bond market accepted this.

Further reassurance was given that al the banks had sound business models and the whole thing was a minor glitch caused by a shortage of short term lending to the banks.

We were also told the government were not crazy and would not just invent money when ever they felt like it.

The banks business models have proven to be flawed, the loans no longer seem temporary.

The government will try their favourite method when in trouble...... Change the name.

Will the bond markets accept the rebranding of SLS to DWS.

Perhaps they have no choice but to hope it will all be OK

Surely it is becoming obvious that everytime any government is struggleing to justify policy they just invent new terms shotened to 3 letters. (SLS DWF WMD)

They will run out of 3 letter combinations soon.

Can I suggest the inclusion of numbers too.

DWS1 will appear much more likely to work than a simple boring DWS.

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Let's bump this thread with a bit more from Pesto:

Can we avoid Credit Crunch 2?

But in practice, and in the short term, banks would endeavour in part to meet the new targets for capital ratios by shrinking their balance sheets. Or to put it another way, they would lend less.

How much less? Well if British banks endeavoured to increase their equity capital ratios by 1 percentage point exclusively by shrinking their balance sheets, that would see them lending a staggering £600bn less on a risk weighted basis (based on 2008 figures) and £1800bn less in respect of gross assets (equivalent to rather more than the output of the British economy).

Now the withdrawal of credit on that scale very quickly wouldn't lead to a return to recession - it would probably engender a full scale depression.

Peter.

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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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