The BoE Is Getting Ready to Pump Again

Apparently the recent friendly suggestion by Adam Posen (who leaves his post at the BoE to join some 'think-tank') that the BoE should monetize commercial loans has met with swift approval by his boss Mervyn the printer-in-chief.

The WSJ reports:

 

„The U.K. on Thursday unveiled an extraordinary series of measures designed to insulate the British financial system and economy from the euro zone's deepening crisis.

Chancellor of the Exchequer George Osborne and Bank of England Gov. Mervyn King announced plans to flood banks with cheap funds in a dual attempt to jump-start lending to British households and businesses and to fend off potential financial problems at big U.K. lenders.

 

The programs resemble some of the emergency measures enacted by central banks in Europe and the U.S. during peak crisis periods in recent years. The British announcement on Thursday, at an annual black-tie dinner with bankers in central London, reflects leaders' intensifying concerns that Europe's crisis threatens to drag down the U.K. economy and financial system.

"These are very difficult economic times—as difficult perhaps as any our country or our continent has faced outside of war," Mr. Osborne said. "Together we can deploy new firepower to defend our economy from the crisis on our doorstep."

 

Messrs. Osborne and King said that in coming weeks they will start offering banks multiyear loans at below-market interest rates so they can make loans to support the "real economy"—in other words, British businesses and individuals who have been complaining about a lack of available credit.

Separately, they said that the central bank for the first time will activate an emergency liquidity facility that will offer six-month loans to U.K. banks in exchange for a wide range of collateral. The program, set up at the end of last year, is designed to be used "in response to actual or prospective market-wide stress of an exceptional nature," in which banks could find themselves locked out of normal funding markets.

[…]

Details of the programs remain vague. But British officials said they could translate into tens of billions of pounds being funneled into U.K. lenders.“

 

(emphasis added)

It is worth noting that the BoE has been among the most active and eager monetary pumpers since 2008. It has nothing – repeat, nothing – to show for it. This is no surprise; if one keeps inflating in the face of a bust engendered by the collapse of the previous inflationary boom, one merely keeps the economy from adjusting, while greasing the way for even more capital malinvestment. While financial assets may get a boost, the economy weakens further as more capital is wasted in uneconomic projects. Eventually growth in the economy's pool of real funding may stall out or even reverse.

In essence they are now saying: 'lets do even more of what hasn't worked so far'. A bunch of real geniuses at work there.

A copy of Mervyn King's related speech can be found here (pdf). It is by the way astonishing that in spite of a massive 'QE' exercise to date, the BoE has failed to actually get the true UK money supply to grow. Since the euro area crisis has begun, money supply growth in the UK has actually stalled out.

 


 

Year-on-year growth in UK true money supply (TMS) and broad money M4, via Michael Pollaro – click chart for better resolution.

 


 

By contrast, BoE credit has massively expanded – click chart for better resolution.

 


 

SNB – 'Unlimited Currency Buying'

Meanwhile, the Swiss National Bank, which has increased its foreign exchange reserves by leaps and bounds in its quest to keep a floor on the exchange rate between the euro and the Swiss Franc (it is noteworthy that the Swiss yield curve is now trading at 'negative interest rates' out to five years as speculators bet that the peg will eventually fail), swears up and down that it will keep defending this line in the sand. This requires money printing on a truly colossal scale. The latest development is that it thresatens to impose capital controls – not in order to keep money in Swizerland, but to keep it out! Thus the utter perversion of the free-floating fiat money system is once again vividly illustrated.

 

„The Swiss National Bank dangled the threat of capital controls to hold down the value of the franc if the euro zone crisis escalates, days before a Greek election that could drive another flood of money into the safe-haven currency.

The central bank said it was determined to defend a cap of 1.20 per euro on the franc it imposed on Sept. 6 and was ready to buy foreign currency in "unlimited quantities".

"Even at the current rate, the Swiss franc is still high. Another appreciation would have a serious impact on both prices and the economy in Switzerland," SN B Chairman Thomas Jordan told a news conference on Thursday.

"The SNB will not tolerate this. If necessary it stands ready to take further measures at any time." Asked repeatedly about the possibility of capital controls, Jordan declined to say what sort of additional steps the SNB was looking at.

"Concerning capital controls, there are various experiences and various ways to implement them and there are also countries that have also had positive experiences with these measures in the recent past," he told one questioner.

"We are continuously looking at all possible other measures. It is to be understood in the sense of an emergency plan, if there is a corresponding escalation of the crisis."

 

(emphasis added)

Of course one can only buy something in 'unlimited quantities' by creating unlimited quantities of money ex nihilo. Does nobody find this surreal?

 


 

The euro vs. The Swiss franc since the implementation of the 'floor price' – click chart for better resolution.

 


 

The SNB's 'Monetary Policy Assessment' released on Thursday can be found here (pdf).

 

A Black Swan Waiting in the Wings?

In  a related development, the SNB told its overleveraged commercial banks, that they must shore up their capital, by either selling assets, retaining a sufficient amount of their profits or selling shares. The stock of Credit Suisse promptly plummeted below its 2009 panic low. The main target of the SNB's admonishments was Credit Suisse. It is interesting that the SNB not only highlighted the potential for the euro area crisis to get out of control, but also the danger emanating from Switzerland's increasingly overheated real estate bubble:

 

“"For Credit Suisse, given the low starting point and the risks in the environment, it is essential that it already substantially expand its loss-absorbing capital base during the current year," the SNB wrote in its annual financial stability report, which focuses on the Swiss banking sector.

"Apart from the planned reduction of risk, these improvements can also be achieved in other ways, such as by suspending dividend payments, or even by raising capital on the market through share issuance," the SNB said.

Credit Suisse paid out 0.75 Swiss francs per share to shareholders in 2011, down from 1.30 francs in 2010. Meanwhile, UBS last year paid its first dividend – just 0.10 francs per share – since the financial crisis.

While Credit Suisse was singled out – unusual for the SNB – rival UBS, which had to be bailed out by the Swiss government in 2008, was also cautioned to keep course with its strategy to stow away profits instead of paying cash out to shareholders.

Neither bank are being asked to hold more capital than required under new rules, but instead are being urged to reach higher requirements sooner. Both hold more capital than rivals according to existing rules, but fall behind under international Basel III rules coming into full force in 2019, the SNB said.

The SNB also criticized that leverage at UBS and Credit Suisse remains "very high", despite cutbacks on risky assets at both banks. UBS and Credit Suisse should trim their balance sheets, and not merely slash risk-weighted assets, the SNB said.

Chief among the SNB's worries are the collapse of a euro zone bank, the bursting of a bubble in the Swiss housing market as investors flee towards assets perceived as safe, persistently low interest rates, and increased funding difficulties.

Though Credit Suisse and UBS are only moderately exposed to euro zone debt and loans, they both face "substantial losses" should European banks fall further into crisis, due to counterparty links to Switzerland, the SNB warned. "The risk of a major bank failure remains substantial," it said.

The SNB's report highlights that Credit Suisse, an early adopter of the central bank's push for contingent convertible bonds, or CoCos, is at a disadvantage because the instruments aren't likely to be recognized under Basel III.

[…]

The SNB cautioned that a potential collapse of Swiss real estate prices poses a threat to banks with big mortgage books. More personal insolvencies and an uptick in Swiss household debt to gross domestic product highlight banks' increasing vulnerability, the SNB said.

The central bank has repeatedly warned of overheating after a flood of demand in hot spots such as Lake Geneva, Lake Zurich, Zug and ski resorts fuelled a surge in prices.

After repeated warnings to Swiss banks to tighten their lending standards went largely unheeded, the SNB pushed for an emergency buffer. Earlier this month, the Swiss government said it can impose another 2.5 percent additional buffer to underpin mortgage lending if credit growth gets out of control.

 

(emphasis added)

 


 

A 5 year line chart of Credit Suisse (it is easier to see on this one that it actually fell below the 2009 low) – click chart for better resolution.

 


 

CS daily over the past year: here we can see that the move below the 2009 level actually happened with a gap down. Ouch! – click chart for better resolution.

 


 

One datum people should keep in mind here is that although the big Swiss banks are no doubt what is known as 'systemically important', there is nobody who could potentially bail them out. The assets of UBS and Credit Suisse alone amount to nearly 600% of the GDP of Switzerland. This is the most extreme  ratio of local bank assets to GDP in the world as far as we know.

It would be a true 'black swan' if one of these banks were to get into trouble and trigger a wider banking crisis. Mind, we are by no means suggesting that either UBS or CS currently look like they could get into trouble. Both banks have swiftly dealt with their bad assets in the wake of the 2008 GFC and taken huge write-offs. We have no specific insight into their current situation, except to say that given their size and location it seems likely that they are feeling some pressure from the deteriorating situation in the euro area.

Moreover, it cannot be a good sign when their stock prices are in free-fall and the central bank feels compelled to issue warnings. However, the main point here is that no-one has really given them much thought lately, and yet it seems clear that if they were to get into trouble, a 'black swan' event would likely ensue.

This is something one should perhaps file away under the various left-of-field accidents that are potentially waiting in the wings and which one should check up on once in a while (a bit like the occasional glance we are directing at CDS on Japan).

Some observers are clearly concerned by the most recent developments:

 

“Shares of Credit Suisse fell below levels the multinational banking giant hit during the U.S. housing crisis, signaling an even deeper and broader credit crisis may be awaiting global markets, many investors said.

Credit Suisse, the second-largest Swiss bank, with offices in 46 countries, plunged nearly 10 percent in U.S. trading Thursday to below the $18 level hit in 2008 and then again in 2009.

“Most market participants I talk to continue to underestimate the importance of the European banking system to global asset markets,” said Enis Taner, global macro editor at Risk Reversal.com. “European bank balance sheets are more than twice the size of U.S. bank balance sheets and given that the current crisis in Europe is at its root a banking crisis, the situation is potentially more concerning than 2008.”

 


 

Swiss real estate prices, via thebubblebubble.com

 


 

 

 

Charts by: M. Pollaro, bigcharts, stockcharts.com, thebubblebubble.com

 

 

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6 Responses to “If the ECB Doesn’t Print, Its Neighbors Will”

  • mc:

    It is pointless to engage in a printing contest with the EU when you are considered the safe haven. It is precisely the profligate printing of the EU nations that makes the Swiss Franc so appealing to investors. Instead of loading up the foreign exchange with fiat currency, the SNB should be buying gold. The quantity of gold is actually bounded, compared to the SwFranc or Euro which is an exchange for printed junk for printed junk – just a race to the bottom. During the mid 2000s, YoY money supply growth was half a trillion $ or euros – a gushing fountain of money that the SNB could never hope to keep up with. Speculators dont believe the bound of 1.2 will hold, precisely because the ability of the ECB/Fed to print more currency is unlimited. Start buying gold instead, and suddenly the intervention is completely credible – either Switzerland will end up with every gold ounce in the world, or the exchange rate will move back up.
    Finally, selling euros for gold keeps those euros in circulation outside of Switzerland, instead of making the SNB an unwitting participant in the Euro train-wreck as it continues to accrue hundreds of billions of Euros in exchange reserves. If/When the Euro breaks up, those non-EU banks holding euros will be in for a big surprise when countries redenominate their domestic holdings and refuse to accept foreign euros.

  • Kim:

    If the UK money supply has not increased despite massive QE exercises, they may be caught in a liquidity trap which will only make the BoE want to print more. And I agree AustrianJim that Ben does have his finger resting, ever so lightly on the panic button!

  • debeerr:

    Pater, you state “It is by the way astonishing that in spite of a massive ‘QE’ exercise to date, the BoE has failed to actually get the true UK money supply to grow. Since the euro area crisis has begun, money supply growth in the UK has actually stalled out.”

    What are the reasons why the UK money supply has not grown despite all the massive QE exercise?

    Without considering your reply does it not seem ‘safe’ for the BOE to continue to do more of the same in the short/intermediate term ( other than that the process causes malinvestments and reduces the pool of real capital in the economy). In short isn’t more QE just kicking the can further down the road?

    One final point. Regardless of all the massive fiduciary media and credit generated in recent years there has not been any obvious severe price inflation in developed economies. But this is not true. There has been severe price inflation caused by QE and creating credit out of thin air but it is not evident. Without such stimulus prices would have declined substantially which is a good thing for consumers in these tough economic times. This point has been made by you on more than one occasion. My question is – how can this fact be illustrated such that there is a “touch and feel” aspect to the issue understood by the general public that they are being continuously harmed in this reckless exercise(s)?

    • I would make a stab that the British banking system is so leveraged that the money was created long ago. BOE money goes on the debit side of banks, not into the accounts. If they are going to run it off the cliff, I think sending money directly to citizens to spend would be a better way than lending money into a over indebted private sector. Speed on brother, hell ain’t half full, as the old bumper sticker used to say.

  • AustrianJim:

    Sooner or later Ben is going to press the panic button. Just as the next phase of the crisis will make 2008 look mild, so will the response of the central planners to it.

  • jimmyjames:

    Separately, they said that the central bank for the first time will activate an emergency liquidity facility that will offer six-month loans to U.K. banks in exchange for a wide range of collateral.

    ************
    Will that entail opening the back doors of the “bad bank” to wheelbarrow out some “wide ranging collateral” that the taxpayers of England will ultimately stand behind?
    This de-leveraging process is pretty cool if you’re a banker-sucks to be a commoner-

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