http://www.robinhoodfinance.com/blog/index.php Copyright 2012, Richard Senior Richard Senior en-US SPHPBLOG 0.5.1 http://www.robinhoodfinance.com/blog/index.php?entry=entry120517-210309 -Fitch's Fixed Income Investor Survey reports that 0% of respondents think that banks will retain their dominant share of corporates' funding structures. Corporates really need funding from other sources;
-Fitch also reports that the 29 largest banks will need to raise $29bn in common equity to meet Basel III requirements, which would reduce RoE to 8-9%. I can't see investors queueing round the black for shares at that yield.

The more likely alternative, of course, is that banks shed assets: Fitch estimates 12% if no new capital is raised, which would be about $5.6trn from the 29 banks. That's an enormous number to take out of the lending markets!

In the meantime, Solvency II will make it uneconomic (via massive and unwarranted capital charges) for insurers to buy and hold good quality assets such as AAA RMBS-the very type of bonds which banks really need to issue to get the long-term funding demanded by the regulators.

I'm beginning to think that regulators will make our economies far worse than they need to be by this sort of reckless prudence.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120517-210309 Richard Senior Thu, 17 May 2012 20:03:09 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=05&entry=entry120517-210309 http://www.robinhoodfinance.com/blog/index.php?entry=entry120425-082902
The SMEs, which in most cases are the creators of wealth and jobs, are being squeezed more than usual. The FT reports: 'The SMEs are being doubly squeezed as big corporations seek to manage working capital more efficiently. GlaxoSmithKline last year increased the average number of days payable on outstanding trade credit in the UK from 50 to 61 days. That is going on all across the corporate sector of the developed world, helping knock the stuffing out of myriad potential employment creators'.

So the big companies are squeezing the small companies. At the same time, they are building ip huge reserves of cash: £754bn was the amount recently reported by the ITEM Club. It makes sense for cash-rich big companies to deploy their cash in financing the supply chain of smaller companies, whether or not the latter are in their own supply chain.

Everyone benefits: the SME gets the working capital it needs, and the big corporate gets a return which is a multiple of deposits and the like, whilst the economy as a whole benefits. Rated credit protection is available. This would surely be a big step in 'managing working capital more efficiently' rather than screwing the little suppliers as usual. The hard part is getting corporate FDs and Treasurers to move from 'we've always done it this way'.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120425-082902 Richard Senior Wed, 25 Apr 2012 07:29:02 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=04&entry=entry120425-082902 http://www.robinhoodfinance.com/blog/index.php?entry=entry120420-183546
The question is, who are the buyers for this huge slug of assets? And how do they know which "non-core assets"-presumably some kind of loan assets-are worth buying?

Another aspect of deleveraging is NPLs. Fitch reports that "loan sale resolutions may be increasingly favored given the certainty of recovery and recovery timing and the ability to avoid adding workout staff relative to other resolution strategies".

In other words, best get shot of the stuff now at a halfway decent price rather than have a load of hassle and the potential for price falls.

I commented on securitisation and NPLs inLINK HERE

If there really are to be huge asset sales, whether by direct sale or securitisation, the smart thing may be to move early, before many sales take place and the market sags again.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120420-183546 Richard Senior Fri, 20 Apr 2012 17:35:46 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=04&entry=entry120420-183546 http://www.robinhoodfinance.com/blog/index.php?entry=entry120413-145847
A bit cagey, you might say, but it's good to see that regulators are catching up with the fact that securitisation is not a black art, just the abuse of the technique. The next step is to get the regulators to see securitisation as positive, getting long-term funding to banks and long-term assets to investors who need an alternative to government bonds.

Meanwhile the government seems to be getting behind one of the recommendations in the Breedon report, "explore the creation of an aggregation agency to lend directly to SMEs and/or to pool SME loans to facilitate SME access to the public corporate bond markets". This is eminently sensible, but needs careful handling. Not least because, let's face it, we're talking about CDOs here, so the danger is of sloppy journalists churning out scaremongering copy.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120413-145847 Richard Senior Fri, 13 Apr 2012 13:58:47 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=04&entry=entry120413-145847 http://www.robinhoodfinance.com/blog/index.php?entry=entry120330-145904 Link to Green Paper

The term "shadow banking" is a bit unfortunate; etymologically not far from "shady". Maybe that is deliberate. The concern expressed is that entities taking deposits and lending "outside the regular banking system" need closer attention. What is really meant is disintermediation, i.e. borrowing and lending outside the banking system.

Securitisation is inevitably mentioned, but the distinction between maturity arbitrage entities such as SIVs (RIP) and CP conduits on the one hand, and term bonds on the other, is not very clear. The former have the potential to contribute to liquidity crises, whilst the latter does the opposite: if Northern Rock had securitised all its mortgages, it would still be with us today. You can't have a liquidity panic with investors queueing round the block based on bonds legally payable in 20 years.

Money market funds are mentioned, and quite rightly, since they offer immediate liquidity but have longer assets, some of which could be hard to sell, certainly for par, in a crisis.

The overall concern is about liquidity, which is legitimate, but it must be borne in mind that, as Keynes put it, "...there is no such thing as liquidity of investment for the community as a whole". There are legitimate concerns here, but we need to avoid what the Breedon Report called "reckless prudence".]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120330-145904 Richard Senior Fri, 30 Mar 2012 13:59:04 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=03&entry=entry120330-145904 http://www.robinhoodfinance.com/blog/index.php?entry=entry120316-160148
This work was undertaken as specified in the chancellor's Autumn Statement "...to explore how to further develop access to non-bank lending channels, including forms of bond issuance, for SME and mid-sized businesses". This is vital stuff: the report identifies a funding gap of between "c£84bn and c£191bn over the next five years".

The analysis and recommendations are pretty good overall. Our view has always been that carrot is better than stick, i.e. trying to force banks to do things they don't like is much less effective than creating alternative structures. Breedon is good on the latter, recommending various initiatives to get money from where it is currently receiving a low yield, to where it is needed.

The parts about getting big companies to behave like good corporate citizens are less persuasive as, like big banks, they will tend to follow their own self interest. Likewise, the supply chain finance model is one I first worked on in the 90s-small supplier to big company, and bank funded. The real need is in the SME-SME area. We have developed an insured structure which is Enterprise Investment Scheme compliant, i.e. 30% tax benefit for UK taxpayers. Works for trade finance too, getting non-bank money to this important area.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120316-160148 Richard Senior Fri, 16 Mar 2012 16:01:48 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=03&entry=entry120316-160148 http://www.robinhoodfinance.com/blog/index.php?entry=entry120307-085918
According to this article, the banks have apparently criticised the FSA for not creating a clear framework for unrated issuance of SME securitisations. That doesn't make a lot of sense at face value:
-There never has been much of an SME securitisation market in the UK (there should be, of course).
-Who are the potential investors in unrated securitisations?
-Banks have the ability to lend if they want to, securitisation or no securitisation

So don't whinge about the FSA and get lending.

In countries where SME securitisation was common in previous years, Spain and Germany, there ahave been problems due to lumpy portfolios and inability to refinance-the latter rather like CMBS.

What is really needed is a way of making investors confident in the quality of various ABS such as prime RMBS. A stamp of quality additional to and independent from ratings would be very helpful. Unfortunately this seems to be a very slow process. There is a trade body in Germany called the TSI. I mentioned this to them five years ago, before the crisis. Their website still carries this as an aspiration: "Another object­ive is to establish a brand for German securitisation transactions which sets a high standard in terms of transparency, investor information and market making".
]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120307-085918 Richard Senior Wed, 07 Mar 2012 08:59:18 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=03&entry=entry120307-085918 http://www.robinhoodfinance.com/blog/index.php?entry=entry120224-144718 http://ftalphaville.ft.com/blog/2012/02 ... ro-part-1/

The focus is on Standard Chertered, which has done several deals whereby an equity tranche of a portfolio is transferred to a non-bank via a credit default swap. The investor gets a coupon of Libor plus 14%. The weighted average risk factor equates to BB. Moody's idealised expected loss in 1 year for BB assets is 0.86%, so 14% looks like a juicy return on risk.

So why are SCB doing this? It can only be regulatory arbitrage, i.e. convincing the regulator that their model's analysis of risk makes it worthwhile to pay investors big risk-adjusted margins to reduce regulatory capital.

The bank, interestingly, states that it is not subject to 122a requirements to retain 5%, so the investors can't be EU regulated entities.

There is also a senior CDS totalling $270m with a company called Standard Chartered (CT) Limited "although the credit risk is expected ultimately to be retained within the SCB Group".]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120224-144718 Richard Senior Fri, 24 Feb 2012 14:47:18 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=02&entry=entry120224-144718 http://www.robinhoodfinance.com/blog/index.php?entry=entry120206-152749
As we know, covered bonds are 'flavour of the month' with many regulators and investors. Prime RMBS have been tainted by association with more outlandish structures such as CDO squared, but have in fact performed very well indeed through the crisis. So it's interesting to hear what investors have to say. Here are some of their comments:

-RMBS is better in a stronger country: compare say Granite (UK) which has recently topped up the reserve fund to full; and some of the more horrible Irish RMBS;
-RMBS has clearer documentation dealing with what really happens in the event of an enforcement;
-Covered bonds have triggers to increase the cover pool, whereas RMBS does not.

The general preference is still to invest in CBs rather than RMBS, but there is a perception that CBs are being built up as the way forward, when in reality they are a short-term fix: there is an upper limit to how much can be issued in CBs, and with senior unsecured investors fearing 'bail in' clauses, the question arises as to where the longer term funding for banks is coming from.

On a related topic, I recently met a director of a UK bank, and suggested that we look at doing a covered bond of SME loans. Commerzbank is rumoured to be working on this already.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120206-152749 Richard Senior Mon, 06 Feb 2012 15:27:49 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=02&entry=entry120206-152749 http://www.robinhoodfinance.com/blog/index.php?entry=entry120119-172204
The FT's Alphaville has recently run some pieces about how regulatory capital arbitrage is possible under Basel III. These make the point that this activity is most certainly happening. The title is "Back to the BISTRO", a reference to some famous JP Morgan deals of the late 90s. I remember at the time trying to work out how these BISTRO deals worked, and it took a while to realise that they were an arbitrage based on moving assets from the banking to the trading book and buying protection from a non-bank.

These days the arbitrage is not banking v trading book, but the transfer of sufficient risk to the non-bank sector to convince regulators that "significant risk" has been transferred. It's a more sophistictaed version of form over substance, but form over substance is what it is.

This one will run and run: in the same way that it is worth the while of big firms to pay expensive advisors to minimise tax, so big banks can afford to pay for ways of freeing up regulatory capital.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry120119-172204 Richard Senior Thu, 19 Jan 2012 17:22:04 GMT http://www.robinhoodfinance.com/blog/comments.php?y=12&m=01&entry=entry120119-172204