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A flurry of equity-raising by European banksAPOCALYPTIC predictions about continental European banks’ capital levels have been made for some time, usually by people across the Atlantic or English Channel. They are more leveraged than their American peers, the charge goes, and far slower to recognise bad debts. This week saw rights issues launched by two of Europe’s giants, BNP Paribas of France and UniCredit of Italy, for a combined €8 billion ($12 billion). Spain’s Santander, the euro zone’s largest bank, is floating part of its Brazilian arm, which could raise i
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ts parent a billion dollars of capital. Norway’s largest bank, DnB NOR, said it would sell up to €1.6 billion of shares on September 25th.An admission of weakness? Not really. BNP is taking advantage of bouncier markets (see chart) to make early repayment of the hybrid capital it got from the French government. Both UniCredit and DNB NOR are raising funds to avoid tapping their governments’ relief programmes (Italy’s Intesa Sanpaolo also said it would no longer seek to tap the state). European core Tier-1 capital ratios typically stand at 7-8%, the same as at America’s big banks (although DNB NOR is aiming for 10%). Leverage ratios, which compare equity with reported assets, look worse for Europeans partly because of accounting quirks. ...
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Governments will remain big stakeholders in banksIN THE final chapter of his “General Theory”, Keynes foresaw “a somewhat comprehensive socialisation of investment”. In a capitalist society investment depends on the animal spirits of entrepreneurs and the constancy of investors, who must commit their funds to uncertain ventures for extended periods. Keynes doubted that either force would reliably ensure enough investment to keep the economy fully employed, especially during turbulent times. In the thick of the crisis his prediction appeared to be coming true. By the spr
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ing of this year the world’s governments had injected $432 billion of capital into their banks, according to the IMF, and guaranteed bank debts worth $4.65 trillion. America now holds a 34% stake in Citigroup, or “Citigov”, as the financial blogs call it. The British government owns 43% of Lloyds Banking Group and 70% of Royal Bank of Scotland. ...
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The Anglo-Saxon model has taken a knockTHE past two years have rather obscured the charms of the free market. For those seeking to restore their faith, a trip to the Kashmir Valley provides some unlikely solace. The floating vegetable market that assembles at dawn on Dal Lake is perhaps the easiest market in the world to romanticise.Shortly after the call to prayer sounds from the lakeshore shrine, farmers and traders cast off on narrow skiffs to truck, barter and exchange. Their boats bob and sway as bids and offers rise and fall. Sellers bump gently into buyers, putting a foot in the custome
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r’s boat to ensure that the deal does not drift away. Sprigs of mint, red coils of lotus root and bundles of knotted cabbage change hands for a few rupees, tossed from one boatman’s lap to another. The terms of exchange float freely—and, best of all, the traders do not need bailing out. ...
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Mobile phones have transformed lives in the poor world. Mobile money could have just as big an impactONCE the toys of rich yuppies, mobile phones have evolved in a few short years to become tools of economic empowerment for the world’s poorest people. These phones compensate for inadequate infrastructure, such as bad roads and slow postal services, allowing information to move more freely, making markets more efficient and unleashing entrepreneurship. All this has a direct impact on economic growth: an extra ten phones per 100 people in a typical developing country boosts GDP growth by 0
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.8 percentage points, according to the World Bank. More than 4 billion handsets are now in use worldwide, three-quarters of them in the developing world (see our special report). Even in Africa, four in ten people now have a mobile phone.With such phones now so commonplace, a new opportunity beckons: mobile money, which allows cash to travel as quickly as a text message. Across the developing world, corner shops are where people buy vouchers to top up their calling credit. Mobile-money services allow these small retailers to act rather like bank branches. They can take your cash, and (by sending a special kind of text message) credit it to your mobile-money account. You can then transfer money (again, via text message) to other registered users, who can withdraw it by visiting their own local corner shops. You can even send money to people who are not registered users; they receive a text message with a code that can be redeemed for cash. ...
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Buying Wachovia was strategically astute but financially messy“TOGETHER we’ll go far.” Wells Fargo’s corporate slogan is a pledge to its customers, but it might just as well reflect the San Francisco banking giant’s optimism about its takeover of Wachovia, a teetering rival it snatched from under Citigroup’s nose last October. Losses from the acquisition are “still in the same zip code” as the sum envisaged at the time, says John Stumpf, Wells’s chief executive. In another sign of self-confidence, Dick Kovacevich will step down as chairman
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at the end of the year, a move that would be hard to imagine if the bank’s hands-on former boss were worried about the future.Others are less convinced, suspecting Wells of understating Wachovia’s loan losses and questioning its accounting. Fuelling these worries, says Dick Bove of Rochdale Securities, is “extraordinarily poor” communications and disclosure. Alone among big banks, Wells does not hold a quarterly call for analysts. ...
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You might suppose that financial innovation had done enough damage. But bankers, investors and philanthropists believe it can help the world’s poorMANY nodded when Lord Turner, the City of London’s chief regulator, said recently that the financial industry had grown “beyond its socially useful size”. The idea that devices such as collateralised debt obligations and credit-default swaps have been a blessing, not least by allowing the less well-off to buy houses, is in tatters: lots of those new homeowners have lost their houses as well as their jobs. It is remarkable, th
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en, that the crisis should have given fresh impetus to “social finance”, a movement based on the belief that financial innovation can be used directly to help society’s neediest people. Two events this month should give believers in social finance a lift. On September 1st nearly 900 people, from institutional investors to social entrepreneurs, gathered in San Francisco for SoCap09, a conference dedicated to building “social capital markets”. The event was abuzz with novel ideas such as a “social stock exchange” and “sustainable hedge funds”. ...
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British banks haggle over asset- insurance schemesSIGNS of life? Royal Bank of Scotland (RBS) and Lloyds Banking Group (LBG), two of Britain’s biggest banks, both confirmed this month that they were looking at ways of raising capital from the market rather than giving the government a bigger stake. That they need more capital is incontestable. How much more, and where it comes from, depends in part on prolonged negotiations over the terms of Britain’s Asset Protection Scheme (APS), under which the government has been insuring around GBP585 billion ($958 billion) of the banks’
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bad assets for a still undetermined fee, payable in the form of shares.Britain’s Treasury, assisted by Credit Suisse and a handful of other experts, is sifting through the assets and pricing the risk of loss. But conditions have changed since February, when the exercise began. The rally in the markets means that even some of the more toxic structured products are now finding piecemeal buyers, and that capital is easier to raise. So RBS and LBG want to renegotiate to reduce the cost of the insurance and the volume of assets they place into the scheme. (They are not the only ones in this position: Bank of America stumped up $425m this week to end a loss-sharing agreement of its own with the American government.) ...
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France gets tough on bankers’ payEARLIER this month BNP Paribas, France’s biggest bank, was planning to pay €800m ($1.1 billion) of bonuses to employees in 2009, out of a total bonus pot of €1 billion. That would have left €200m to be paid in future years. BNP reckoned this would satisfy new rules introduced in February which require banks to defer compensation in case trades go wrong. BNP’s plans nonetheless caused widespread outrage in France. On August 25th the country’s president, Nicolas Sarkozy, told bankers that 50% or more of any bonus award mu
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st be held back over no fewer than three subsequent years. BNP will now pay out just €500m upfront. France’s chastened bankers agreed this week to also accept a “pay tsar” to monitor bonuses. Michel Camdessus, a former boss of the IMF, will be the first to hold the post. Mr Sarkozy dubbed a new scheme, under which traders may forgo bonuses depending on banks’ overall performance, a bonus-malus system. In addition, banks must publish bonus policies, and trading-floor chiefs will cede control over bonuses to board-level remuneration committees. Mr Sarkozy even wants big banks in the G20 countries to cap total bonus payouts to a fraction of their revenues. ...
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Where has the flood of credit gone?THE surge in China’s bank lending this year partly explains why its economy has recovered much faster than other big economies. If, as many investors fear, the government has already turned off the credit tap, that could hurt economic growth. A closer look at the figures, however, suggests otherwise.New bank lending did indeed slow sharply in July, to 356 billion yuan ($52 billion) from 1.53 trillion yuan in June. “China’s bank lending fell by 77%,” screamed the headlines. But bank lending always slows in the second half of the year; t
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he 12-month pace of growth is therefore a better measure. On a year-on-year basis bank lending grew by an impressive 34% in July, roughly the same pace as in June. Moreover, the drop in new loans in July largely reflected a fall in short-term bills; medium and long-term loans to firms and households continued to grow briskly. And a large chunk of lending to firms earlier in the year has been parked in deposit accounts. Thus, despite falling profits, corporate deposits have soared by 35% over the past 12 months (see chart). This leaves firms with plenty of money to finance investment, and so sustain the recovery, even if the government tightens up. ...
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New Zealand has hammered out a liquidity policy—but it is not for everyoneREGULATORS have spent decades constructing elaborate rules for bank capital, but prescriptions on how banks should manage liquidity are much thinner on the ground. Enter the Reserve Bank of New Zealand, which has become the first authority to pass hard-and-fast rules for liquidity since the crisis. Locally incorporated banks will be expected to meet a trio of specific funding ratios within a couple of years. Two “mismatch” ratios are designed to ensure that banks have enough cash and liquid assets readi
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ly available if creditors suddenly come calling. The third measure, a “core funding ratio” (CFR), is more novel. At least 75% of banks’ total lending will have to be funded with stickier liabilities such as retail deposits and wholesale borrowing maturing in more than a year. Depositors are less likely to yank their money because it is insured; with luck, any crisis will have passed before longer-term wholesale debts come due. ...