Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Categorized | Banks, Capital Markets, Economy

Weidmann in sovereign debt warning

Posted on September 30, 2013

Jens Weidmann, Deutsche Bundesbank president©Bloomberg

Jens Weidmann, Deutsche Bundesbank president

Jens Weidmann, president of the Bundesbank, has risked angering Europe’s crisis-hit governments by warning of the dangers posed by high levels of sovereign debt on banks’ balance sheets.

Writing in the Financial Times, Mr Weidmann demands that lenders cut their holdings of government bonds and set aside more capital to reflect their riskiness. “The time is ripe to address the regulatory treatment of sovereign exposures,” he writes.

    His intervention comes as the European Central Bank considers whether to offer another set of cheap multi-year loans, known as long term refinancing operations or LTROs, as its first two LTROs, deployed in 2011 and 2012, approach maturity. Anecdotal evidence suggests a great part of the €1tn the ECB pumped into the banking system in LTROs was invested in sovereign debt.

    Mr Weidmann notes that there is no limit on a bank’s exposure to a single sovereign, whereas the risk they can take on from other counterparties is limited to a quarter of their eligible capital. Additionally, sovereign debt attracts low or zero capital requirements for the banks.

    This has made it very attractive for banks to invest in government bonds and the “home bias” of buying the local sovereign’s debt has increased during the crisis. Because such debt can usually be lodged as collateral at the ECB in return for cheap funding, exposure to government bonds of countries like Spain and Italy is even more attractive since the debt now also yields more.

    “The more vulnerable banks are, the more they expose themselves to sovereign debt,” Mr Weidmann writes. “Weak banks invest in high-yield sovereign bonds and refinance at currently low interest rates. Such ‘carry trades’ sustain the low profitability of those banks and postpone necessary adjustments of their business model.”

    The Bundesbank chief, who also sits on the ECB’s governing council and stood alone in opposing its landmark bond-buying plan last year, said the banks loading up on such debt enjoyed the “yield mark-up if things go well” and “what happens in the event of a joint sovereign-bank default is not relevant to them.”

    Across the euro area, the share of sovereign bonds in total bank assets has increased over the past five years to 5.3 per cent from 4 per cent. But the figure rises to 10 per cent for banks in Italy and 9 per cent in Spain, according to calculations by Barclays.

    While Mr Weidmann’s proposal would entail big changes in regulation and would take years to agree, it could weigh on ECB policy makers’ minds as they consider another LTRO and prepare to undertake a comprehensive assessment of the health of the biggest 130 eurozone banks ahead of taking over supervisory responsibility for them in a year’s time.

    Additional reporting by Ralph Atkins in London