Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

Continue Reading

Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

Continue Reading

Currencies, Equities

Scary movie sequel beckons for eurozone markets

Just as horror movies can spook fright nerds more than they expect, so political risk is sparking heightened levels of anxiety among seasoned investors. Investors caught out by Brexit and Donald Trump are making better preparations for political risk in Europe, plotting a route to the exit door if the unfolding story of French, German […]

Continue Reading

Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

Continue Reading

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 […]

Continue Reading

Categorized | Banks

ECB’s bond move whets appetite for QE


Posted on October 21, 2014

epa04240525 Dark clouds over the Euro Sculpture outside of the European Central Bank building in Frankfurt Main, Germany, 05 June 2014. The European Central Bank cuts interest rates to an historic low of 0.15 per cent to spur economic growth and bank lending. EPA/ARNE DEDERT©EPA

News that the European Central Bank has begun its programme of buying covered bonds from banks in Spain, France and Germany will only whet the market’s appetite for full-blown quantitative easing.

Covered bonds – considered palatable assets because they give the buyer dual recourse, to both underlying collateral and the issuing bank – are part of Mario Draghi’s recipe for lowering banks’ borrowing costs, boosting their lending, and strengthening the ECB’s own balance sheet. But, like the best amuse-bouches, Mr Draghi’s plan is being derided by some as wafer thin – in volume and substance.

    On paper, at least, the opposite seems true. The ECB president has implied that the bank intends to buy a meaty €1tn of covered bonds and other asset-backed securities.

    One ECB official has estimated that the value of outstanding eligible covered bonds was €600bn. However, because banks benefit from covered bonds’ low risk weights under the Basel III rules, they are unlikely to want to sell. According to some estimates, the ECB could potentially target about one-third of the eligible market – but it would be competing with existing investors, much to the latter’s chagrin.

    New issuance is shrinking fast: only €91.7bn-worth have been issued in the year to date – the lowest total for nearly two decades, according to Dealogic.

    Meanwhile, yields, which help to determine borrowing costs, are already on the floor. Average covered bond yields dropped below 1 per cent for the first time in June, according to Bank of America Merrill Lynch’s euro covered bond index. They currently stand at about 0.55 per cent after a record low of 0.48 per cent last week as investors made a dash for haven assets amid market turmoil.

    European bank covered bonds

    Then there is the biggest obstacle: European banks do not need the ECB’s cheap financing help. If the ECB wants to have an appreciable effect on boosting lending, critics say it needs a plan to deal with the riskier assets on banks’ balance sheets that consume capital and hinder new loans. It should also target those bonds it can buy in super-large quantities, say analysts, such as sovereign debt.

    A simple hors d’oeuvre of covered bonds will not do. The market wants a 12-course meal.

    christopher.thompson@ft.com

    You need JavaScript active on your browser in order to see this video.

    No video