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This Is Really Bad For Banks

Once upon a time, falling interest rates were great for banks. A lower cost of capital gave lenders access to cheap raw material while causing borrowers to clamber for what banks were selling. Large profits usually ensued.

But not now. Rates have fallen past the banks’ sweet spot to levels that just don’t work. Borrowers appear to be spooked rather than energized and trading desks are imploding amid “paralyzing volatility“. See German 2-year bond yields collapse below -50bps for first time ever and UBS’s investment bank earnings decline 63% on equities trading.

And now yield curves are inverting — that is, long rates are falling below short rates, which means banks’ borrowing costs (the short end of the yield curve) are starting exceed their lending revenue (the long end of the curve). See Japan’s yield curve faces further pounding amid BoJ aftershock and US Treasury yield curve inverts.

To add a little spice to the toxic stew, capital controls are coming back into style:

Germany proposes new cash ban and capital controls as Europe rushes towards NIRP

(Examiner) – Last Friday, Japan was the first major economy to cross the ‘Rubicon’ by implementing negative interest rates (NIRP) in an attempt to force their people to spend, and slow deflation as the 3rd largest economy moves into recession. However, in this Japan is not an island, with several other nations already preparing to do the same to protect their diminishing economies.

And in all of this there is one surprising country that appears to also be preparing for NIRP as on Feb. 3, coalition group of German legislators introduced a bill to limit the use of cash, and to ban the use of the 500 Euro bill in personal and non-bank transactions.

The significance of this is that when a central bank implements policies that make holding your money in a bank a liability, then the natural recourse is for depositors and account holders to simply take it out and move their wealth into assets that are either outside their nation’s currency, or into commodities such as gold and silver which provide no benefit to an economy that desperately needs its people to spend and create inflation and growth.

Not surprisingly, US bank stocks are getting whacked. As of 9am on Wednesday Feb 3:

Bank stocks Feb 16

Bank of America (BAC) stands out as especially cringe-worthy, having fallen from north of $18 per share to below $13 in just a few weeks:

BofA stock Feb 16

What does all this mean? The broad-strokes answer is that these huge, nearly-omnipotent entities that have dominated and defined the world’s economic and political landscape may finally be receding towards a more reasonable level of power. One way to gauge this is by the rhetoric coming out of the current presidential candidates, all of whom have decided that it’s not just safe, but profitable to bash Wall Street. Dimon, Blankfein, et al are clearly not the bullies they once were.

More immediately it means there’s a new black swan in the sky. As a group the world’s biggest banks are leveraged to an extent that probably has the authors of the Glass-Steagall Act spinning in their graves. The notional value of their over-the-counter derivatives books dwarfs the global economy, while their exposure to now-moribund sections of the oil and gas industry guarantees massive write-offs in the year ahead. The question isn’t whether the big banks will report huge losses, but whether one of them will be destroyed in the process, giving us another Lehman Moment.

16 thoughts on "This Is Really Bad For Banks"

  1. The herd is not so boring, if you study it during times of danger. There is danger now. How will the herd react? Well some will peel off and not be seen again. We can wonder whether those know something the rest don’t. Those who haven’t seen danger will try to lead and tell those who are perhaps naturally anxious that there’s nothing to fear but fear itself. Those calming words will seem very wise to some. But if you get it that no one in the herd seems to be saying anything that might provide honest protection, then I’d say leave the heard. See if you can catch up to those who already left.

  2. Happy to be proven wrong but I suspect the achilles heel of banks worldwide won’t be related to interest rates but moreso to asset valuations. Heavy deflation of various asset classes may be what destabilises banks, as occurred on 2008. Thing is that there are a lot more “bubbly” asset classes around today.
    Where I live, interest rate cuts don’t have to be and aren’t always passed on, the banks just inflate their margins if loan volumes are down and there’s a clear level of collusion across the big banks with interest rates. Banks will always apply the “golden rule” of finance until they can’t.

  3. From the studies I’ve read, roughly 22% of Americans do not have a bank account, mostly because they can’t maintain a minimum balance. It will be interesting to see how governments deal with this in a cashless society.

    1. I believe this will not be a problem as you will be forced to have a bank account or you will not get any money. Then the banks will charge big fees for this 0 balance accounts and the people will rebel against the entire concept. I agree it will be interesting to watch.

      1. When they try to ban cash remember the standard govt line, “The nobler the language, the more nefarious the legal instrument.”

    2. One of my two employers requires direct deposit, if you want to get paid. Also, food stamps, or whatever they call them now-a-days, come in the form of a debit card, not the old paper coupons of 30 years ago.

      They will argue that drug gangs and ‘terrorists’ are using cash money for their evil deeds, and use that as justification of doing away with cash use above a trivial level at first. Maybe $1000? Then they will do away with cash altogether, eventually, I’m guessing.

      It is crucial to have a balanced portfolio with many different tangible components. Not just gold and silver. For the last 10 years I have put every spare dime into developing a rural property. (irrigation systems, fruit trees, etc.)

    3. They will simply confiscate all money in the accounts and send everyone back to ground zero. The will then demand that everyone take the mark of the beast, which will also be your new bank account number. Those who refuse will be put to death.

      1. Nah. They’ll just steal a large % from “rich” people who have been slaving away to put away 100k and higher. The Bolsehviks are all about “leveling the playing field” and reducing everyone to a living paycheck to paycheck basis. They’ll steal from the “upper middle class” and higher first so the vast majority of broke fools don’t start too much social unrest. These scoundrels have already done this over and over in many countries over the years. They know what to do. DO YOU?! Bullion, food, supplies, and last but not least don’t forget lead delivery systems!

  4. I actually hope that European banks start to ban cash currency because I want to see how the citizens will respond. It’s probably too much to hope that they would rebel against it on theoretical grounds (i.e., ‘government is not your friend’) but I suspect all kinds of practical problems will arise that the “elites” haven’t even considered and that could spur a backlash. Europeans deserve what they get, and they’re gettin’ it good.

    In the meantime, the solution for banks – though I don’t want to tell them this – is to lend “money” to themselves (either to each other or just internally). Since they literally create money by lending, that will make them liquid again.

    1. That’s a good point. Suspect Janet would like to see how this “plays”, as well, just like the NIRP policy she is “researching”.
      I’ll say one thing: when you see Europeans explode into physical silver & gold, it’ll be time to head for the hills.

    2. What you’ll see on a large scale in a cashless society is a combination of 2 things. Trading of physical items will come into vogue (ie: a gallon of gas for a dozen eggs) and black market cash.

  5. Why would these entities, now facing an existential risk, not “run to safety” in gold & silver like the rest of us morons?

    1. Because they all went to govt schools where they were not taught monetary history.
      “The prudent sees danger and seeks refuge, while the simple minded suffer.”

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