Bank Penalties For BNP Causing Discord, Safty Resides In The Common Interest Of Banking Sustainability

Banks committed sins leading to 2008, and they do continue to sin. But most bank transgressions really come from the past with mortgage backed securities. JPM was fined over $20B and BAC looks to be similar. As a taxpayer, I can find justification in too large to manage institutions paying homage to regulatory authorities in largess, in some fashion.....Certainly given 2008 consolidations and associated sins of failing banks that were consolidated into bigger banks. Consequence was the too big to fail idea. Now we see the too big to manage idea.

There is also the Whale Trade with J.P. Morgan, and the serious LIBOR fixing issue with BNP Parabas, a French bank. Still, U.S. is looking for about $10B in penalties from BNP. European authorities have requested consideration from U.S. authorities, but encountered denials.

Now, because of the BNP issue the EU Legislature is proposing as law a single bench mark to gauge price. Perhaps suggested in such a move is fixing European law to prevent major penalties from U.S. regulators. But using only one bench mark is objected to by the European Central Bank (ECB) as not a realistic indicator of true value. Where the ECB"s objection is factual, the EU's position marks a reasonable political line.

By virtue of the U.S. not bi-laterally discussing proposed U.S. penalties on European banks, the appearance conveyed by U.S. representatives is perhaps not only unfriendly, but also arrogant. Truth be told, we live in the same world. Further, Europe is our strongest ally geopolitically.

What would Winston Churchill say under these circumstances....Probably he'd let the finance ministers and bankers figure this out. But today, one really can't let the fox into the hen house. Unless, of course, we understand common ownership of the hen house.
  
On top of the U.S. Department of Justice, or other regulators seeking penalties, regulatory regimes are hard on banks. Obvious consequences are reduced bank lending, increased reserves and provisions for banks paying regulators. Also a consequence is reduced capacity to increase revenue to fill capital and retained earnings in order to meet regulatory requirements.

Bottom line of  overall government action in terms of banking is reduced lending. Today, banks have to protect themselves, certainly if they have shareholders. Bank's are essentially guarding fractional reserve banking to their benefit, even if lending is a minor motivational force. Still, should banks not protect reserves in this environment, they will become an absorbed casualty among an all together glutted banking M&A forced market. Of course it wouldn't hurt if banks just played right.

True need is to find a way to keep banking out of its own hen house, and government not to compete for that same hen house through either regulation or its own lending. Therein resides the market. To accomplish a true market isn't by creating new derivatives of old assets whether they be failing or good. Rather, transparency and published market pricing is what's needed. That was proposed after the Great Depression, was instilled, and brought markets as they now exist, but  now markets are in further need of transparency and access.

Changes needing to be made are updates to transparency and price discovery. There are so many new products on the market today, and so many are hidden behind a curtain whether by price,  fundamentals or correlation . Eliminate that curtain, and global investors will be able to consider price in comparative terms.

ECB's Current Move: Inflating Deflation by Deflating Rates. When is the Next Move?

In the morning we can expect the ECB to put some meat on the bones of its talk. Generally anticipated is the ECB will make a move. What appears rather mellow is the expected move to be made. Economists expect the ECB to start lite with a cut in the main refinancing rate to .15% to .10%. The ECB is also expected to ease the interest rate on deposits from banks at their facility. Economists expect this rate to go to .1%, and economists consider this to be a negative interest rate.

One can only consider this to be a negative interest rate when considering divergent inflation/deflation rates in the euro area. For instance, euro area HICP (harmonized index of consumer prices) was at .2% month over month for April of 2014 and .7% year over year. For May, this same data dropped to .5% year over year. A negative trend in inflation is occurring and certainly far from the ECB's goal of just under 2.0% inflation.

 

Such inflation, actually deflationary, numbers make an ECB deposit rate of .1% essentially a negative .1% in the short term and only .4% year over year. That is, to find the real interest rate, or yield, one subtracts the rate of inflation from the stated rate. Or, in deflation, one adds the rate of deflation to the stated rate to find the real interest rate.

 

Keep in mind, Germany demonstrated actual deflation in April with a Consumer Price Index (CPI) of -.2% and a year over year inflation rate of 1.3%. France was flat on its CPI at 0.0% with a year over year inflation rate of .7%. European Producer Price Index numbers are even worse. European Union flash GDP numbers generally disappointed with import number exceeding export numbers, certainly for Germany.

 

Add to deflationary pressure in Europe the slowing economies of China and Japan (let alone geopolitical risk in Eastern Europe), and one can see the reason for toughening exports out of Europe aside from a high euro. 

 

Simply generating negative interest rates in Europe doesn't kick start economies like Europe. But it might help restart Europe's shadow banking system by giving confidence to other financial intermediaries. ECB's potential action can help mitigate yesterday's term structure risk and essentially move maturity transformation to safer ground for past market transactions.....If only these past transaction had a present day liquid market. I'm referencing, of course, markets to move otherwise illiquid bank loans. 

 

Such wishful projections assume a market, outside of sovereign debt, through which participants can diversify otherwise illiquid assets based on price and maturity. Future looking market participants, however, might see chasing deflation, by deflating the currency, by reducing rates in the present economic/market climate, as growth potential. It's possible.