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OnlyMe

Asset Backed Debt

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Quelle surprise, record levels of debt causing repayment problems. The banks are shoving new debt into the market through this process.

http://www.ft.com/cms/s/23b092f8-2d4b-11db...00779e2340.html

Moody’s had put about £175m worth of Egg’s asset-backed securities (ABS) on watch for possible downgrade this month without explaining why, but added some clarity in a note released late on Tuesday.

The move comes as the outlook for bonds backed by credit card debt continues to deteriorate, due mainly to the high level of borrowings that customers have taken on rather than an increase in unemployment or other financial shocks.

........

Most credit card securitisations are seeing borrowers struggle to repay debt. Fitch said on Wednesday that it was maintaining its outlook for bonds backed by credit cards as stable to negative in spite of considerable deterioration over last year and this

........

There was also bad news for bonds backed by mortgages on Wednesday.

Standard & Poor’s reported increases in arrears and losses among bonds backed by non-conforming mortgages, which include buy-to-let loans and mortgages extended to people rejected by high-street lenders.

Total delinquencies among non-conforming residential mortgage backed securities had risen to 23.17 per cent in the second quarter, S&P said, which is about 10 percentage points higher than a year ago.

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Whilst their current repackage issues may be hurting, its ok as soon there will be a whole new wall of money available to be lent.

With the introduction of the Basel II capital adequacy regime, the Banks will themselves be able to determine the amount of debt they create on the back of their own proprietary risk assessment models.

I understand that at present the reserve ratio for sound institutions is set at around 8%. And since I've never seenthe Banks call for increased capital ratios, it only follows that in the future, they will model their required reserves for new lending to 0, then they can lend infinite amounts of cash and we can all be happy....

Oh yes, that'll be right untill the first major external shock, when they all keel over like fumigated canaries and the go to the government for a massive reflationary handout at the future taxpayers expense.. :ph34r:

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Will they put their money where their mouth is and expose their own reserves to this market though! Could have a crippling effect on their own finances and stock market valuation if it went wrong.

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It all comes down to Risk.

Banks are still very risk averse IMO. However, Central Banks have effectively removed risk from the market by record low base rates, hence the apparent lending madness we see at the moment.

The interesting thing, of course, is that the Central Banks are steadily feeding risk back into the market place. Sooner or later the banks will wake up to this and the credit tightening that is just starting, will really gather pace. Then watch asset prices fall. Inflation is the big uncertainty.

Edited by FTBagain

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I understand that at present the reserve ratio for sound institutions is set at around 8%. And since I've never seenthe Banks call for increased capital ratios, it only follows that in the future, they will model their required reserves for new lending to 0, then they can lend infinite amounts of cash and we can all be happy....

Isn't holding 8% in reserve not just a good idea but also the law? If the goverment wanted to reduce lending without appearing to be responsible for any increase in interest rates they could just raise the size of the reserve that must be held, the Chinese recently did this.

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Della "Isn't holding 8% in reserve not just a good idea but also the law?"

No law says banks must hold a particular level of reserves. However in order for a bank to be engaging in consumer borrowing / lending in the UK they need to apply for a license which are regulated by the FSA, which will agree the ratio minimum for each institution. Simplistically a bit like a credit rating for the bank, the dodgier the business, the higher the minimum reserves they should hold.

Depending on the business the bank engages in, each business line has I believe diffferent weightings for each type of lending. I.e. lending to a prime sovereign government through owning their bonds is considered zero weighting (since a government should be able to tax to pay its interest) etc. all the way down to consumer borrowing which is risk weighted at 100%.

Many banks in fact keep excess capital in reserve, but this results in an opportunity cost, since that lending could potentially be earning returns.

Jason, with all due respect I believe 3.3% would be scarily low, and possibly is not reflective of the UK mainstream institutions. I could be wrong, but its very difficult to know for sure.

The real time segmented information of which assets are being held and their respective risk weightings, are very sensitive to the bank, since it is indicative of its appetite for risk, and therefore could potentially allow competitors to second guess its policy and pricing, and poach business.

The other reason is that as OnlyMe indicated in his post the assets are often repackaged and punted on or hedged to remove the risk from the banks balance sheet. The credit derivatives business on collateralised debt obligations CDO's has been called the toxic waste of the financial services industry, and not without good reason.

I believe in the Jap bank meltdown, the state came to the rescue several times, often using the publics funds to boost asset prices / buying companies to prevent the banks having to book assets as non performing or paying out on default insurance, creating a massive moral hazard. Some rotten banks kept creating loans they knew would be bad almost the moment they were made in order to feather their execs nests. I don't rule out the same happening here if the coming recession is particularly nasty.

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  • 302 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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