Chitchat World's Banks are preparing for Hardship and Deaths, are you ready?

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Banks getting ready for ‘economic nuclear winter’
Published time: 29 Aug, 2016 10:03
Edited time: 29 Aug, 2016 10:30
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Weak corporate earnings, a banking crisis, and the Brexit vote are forcing banks to prepare for the worst case scenario in the second half of the year. According to CNBC quoting a major lender, banks are "preparing for an economic nuclear winter situation."

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"This could mean triggering Article 50, a referendum in other European nations leading to a break-up of the euro or sterling hitting below $1.20 or lower. The banks are ready for anything now," the source in the bank told the broadcaster.

After the United Kingdom voted to leave the European Union in June, there have been talks a similar referendum may be held in France, the Netherlands and other countries.

"Markets hate uncertainty and the events this year have unfortunately created a lot of mystery around what is going to happen next," the source added.

Shares in the biggest banks have been plummeting. Deutsche Bank has lost almost 45 percent, Credit Suisse has lost 41 percent and the Royal Bank of Scotland went down 35 percent in 2016. Uncertainty and volatility has been spotted in all areas of the economy from mining to car production.

READ MORE: Portugal to bail out its biggest bank to the tune of €5bn

By far, Brexit has been the biggest uncertainty on the global financial agenda, but analysts urge companies to keep on working despite the unclear future and make steps to "de-risking and simplifying their businesses."

"I think the main problem for the second half of the year is the uncertainty caused by Brexit, though that's likely to persist for two years or more, so I suspect companies are likely to roll up their sleeves and get on with their business," Laith Khalaf, senior analyst at Hargreaves Lansdown told CNBC.

http://www.cnbc.com/2016/08/29/banks-are-preparing-for-an-economic-nuclear-winter.html

Banks are preparing for an ‘economic nuclear winter’
Spriha Srivastava | @spriha
6 Hours AgoCNBC.com
A man walks along a street covered by snow during a winter storm in Washington January 23, 2016. A winter storm dumped nearly 2 feet (58 cm) of snow on the suburbs of Washington, D.C., on Saturday before moving on to Philadelphia and New York, paralyzing road, rail and airline travel along the U.S. East Coast.
Carlos Barria | Reuters
A man walks along a street covered by snow during a winter storm in Washington January 23, 2016. A winter storm dumped nearly 2 feet (58 cm) of snow on the suburbs of Washington, D.C., on Saturday before moving on to Philadelphia and New York, paralyzing road, rail and airline travel along the U.S. East Coast.

The first half of 2016 has been a roller-coaster for financial markets. A combination of uncertainties surrounding the U.K.'s vote to leave the European Union and weaker-than-expected corporate earnings results across the region means a tough second half looms.

European banks, in particular, have had a very tough six months as the shock and volatility around Brexit sent banking stocks south. Major European banks like Deutsche Bank and Credit Suisse saw their shares in free-fall after the referendum's results were announced. In the U.K., RBS was the worst-hit, with its shares plunging by more than 30 percent since June 24.

The current uncertainty over when the U.K. will start the process of quitting the EU has banks on tenterhooks. But a source told CNBC that banks are "preparing for an economic nuclear winter situation."

Speaking on the condition of anonymity due to the sensitive nature of the topic, a source from a major investment bank told CNBC that financial services firms have put together a strategy in place that takes into account the worst-case scenario that could happen by the end of this year.

"This could mean triggering Article 50, referendum in other European nations leading to a break-up of the euro or sterling hitting below $1.20 or lower. The banks are ready for anything now," the source said.

The source further explained that the challenge in 2016 is nothing compared to when the Lehman Brothers collapsed in 2008 and the banking sector is this time a lot more resilient. "Markets hate uncertainty and the events this year have unfortunately created a lot of mystery around what is going to happen next."

Meanwhile, a common theme across second-quarter results has been a warning of uncertain times ahead. From big investment banks to mining firms like BHP Billiton and Glencore to the auto sector, companies have cited uncertainty and volatility in markets as a reason for weak results and have warned that the second half will be challenging.

An American tourist stands near the Houses of Parliament the day after the majority of the British public voted to leave the European Union on June 25, 2016 in London, England.
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An American tourist stands near the Houses of Parliament the day after the majority of the British public voted to leave the European Union on June 25, 2016 in London, England.

Following that, a number of banks have cut their exposure to equities due to the volatile nature of stocks in the first half the year. Earlier this month, Goldman Sachs downgraded stocks to "underweight" as part of its 3-month asset allocation citing global equities to be at the upper end of their "fat and flat range."

"The second half of the year is going to be very challenging for U.K. corporates," Craig Erlam, senior market analyst at OANDA told CNBC via email. "Not only are they contending with possible recession in the U.K. and more prolonged slowdown, the uncertainty factor surrounding Brexit leaves planning for the future a very difficult task."

Erlam further explained that a number of companies won't know for a while what the future of their operations in the U.K. will look like.

"I imagine many are already putting plans in place for moving operations abroad should the U.K. lose access to the single market. With companies less likely to invest and recession very possible, the second half of the year isn't looking great, particularly for those companies with greater exposure to the UK."

But while challenges continue to loom, some analysts have said it was important for companies to get on with their business.

"I think the main problem for the second half of the year is the uncertainty caused by Brexit, though that's likely to persist for two years or more, so I suspect companies are likely to roll up their sleeves and get on with their business," Laith Khalaf, senior analyst at Hargreaves Lansdown told CNBC via email.

Khaif explained that the challenges will remain but it is important for industries like banking for instance to focus on maintaining their solvency ratios and "de-risking and simplifying their businesses."

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Central banks may need to start thinking about losing weight

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Published: 4:00 AM, August 29, 2016

FRANKFURT — Picture for a moment the concept of a lean central bank.

No, not Ms Janet Yellen or Mr Mario Draghi out doing Pilates, but rather the thought that almost a decade after the Great Recession, central banks ought to be slimming down on the amount of financial assets that they hold.

And yet, as the United States Federal Reserve holds the level of its total assets roughly steady, in Japan and Europe balance sheets just keep growing. At the Fed’s annual policy gathering at Jackson Hole, Wyoming, over the weekend, questions were being asked about how long this can go on.

Take for example the European Central Bank (ECB). The Frankfurt-based ECB is engaged in an asset-purchase scheme worth around €1.7 trillion (S$2.6 trillion) , due to run until at least March next year, in an effort to boost demand and drive inflation in the 19-nation currency bloc away from the deflationary danger zone.

Even so, the official-in-charge of financial-market operations at the ECB wondered out loud in a paper to the symposium about how developed-world central banks can return to their previous level of fitness.

“A perfectly ‘lean’ central bank balance sheet can be defined as one which would have a total length close to the value of banknotes issued,” said Mr Ulrich Bindseil, director-general for market operations at the ECB. “In general, the objective of a lean balance sheet should remain valid in the future long-term operational frameworks.”

Yet, given the ECB’s current asset-purchase plan, the balance sheet is going to keep gaining weight until next year, as further government bonds, private-sector assets and corporate debt are added. Total assets are already three times the value of outstanding bank notes.

Mr Bindseil points to the example of the Fed, pre-crisis, as the epitome of the lean central bank when total assets hovered just above the value of outstanding cash.

Obviously, a lean “rule” for balance sheets is meant to pertain to normal times, whatever they are, not the situation the global economy faces now.

It is just that, with interest rates in major jurisdictions already close to, at, or below zero, the balance sheet route may be one of few viable options for central banks to support the economy when the next recession comes along.

That is, unless something radical can happen to allow central banks to cut interest rates much further below zero, a concept that was presented at the symposium by Carnegie Mellon Professor Marvin Goodfriend.

“Pressure to rely more heavily on balance sheet policy in lieu of interest rate policy will tempt central banks increasingly to exert stimulus by fiscal policy via distortionary credit allocation, the assumption of credit risk, and maturity transformation, all taking risks on behalf of taxpayers and all moving central banks ever closer to destructive inflationary finance,” Mr Goodfriend said. “Interest rate policy is far superior to these alternatives.” Bloomberg