March 2014: publication of a study on Central/Eastern European mortgage and covered bond markets (Realkredit- und Pfandbriefmaerkte in Mittel- und Osteuropa) financed in 2012 by a German covered bond software provider (German). The study benefited from the earlier EBRD study available for download below. Covers also commercial real estate markets and additional countries.
February 2014: brief e-mail comment on the misinterpretations of the German bad bank experience that prevail at the Austrian central bank, re the hefty dispute with the Austrian finance ministry on the method of unwinding the Carinthian Landesbank Hypo Alpe Adria (in German). Or should I say the dispute is between Raiffeisen Bank International and Erste Bank?
January 2014: Presentation given at DG Competition of the European Commission on creditor participation in European bank restructurings. Slight changes vs. the IFO (and December 2013 Cyprus Price Waterhouse conference) versions, e.g. additional material on Slovenia. Presenting at DG COMP on this subject means of course carrying owls to Athens, so I probably learned more from them than they from me.
December 2013: interview with Gold Magazine on the background of the Cyprus creditor bail-in decisions taken in March 2013. I spent a couple of days on the island and came to conclude that the shortcuts taken in March during the purchase and assumption operations (transfer of Greek operations of Laiki and Bank of Cyprus to Piraeus Bank, transfer of Laiki good assets to Bank of Cyprus) and regarding the transfer of legacy ECB debt ('dark matter', which ominously made it from Laiki in Greece to Bank of Cyprus in Cyprus) have produced serious distortions of the outcomes for bank creditors.
I can only hope that with the de-facto establishment of a European FDIC in the form of the SRM, a move that I asked for in the studies of spring and summer below, this degree of operational deficits will become a thing of the past.
November 2013: presentation given at IFO Institute in Munich on Nov 11 ('Muenchener Seminare') on bank creditor participation in Europe.
October 2013: Study launch "Eight Case Studies on Current Bank Restructurings in Europe", a companion piece to the July 2013 financed by the Center for Financial Studies at the University of Frankfurt (Prof. Jan-Pieter Krahnen). The study widens the country angle from 3 (Greece, Spain, Cyprus) to 8 (in addition Germany, France, Denmark, Netherlands, Ireland) and looks into some of the spectacular cases of this crisis, e.g. Anglo Irish and Dexia. For those of you who are curious why your local bank bailout has become so expensive, learn about at the strangely protective behavior of our governments to even junior bond investors in so many cases and ask yourself how serious Europe will really be in changing her deep bailout policies.
Our press release highlights that it is essentially the small jurisdictions, first and foremost the Netherlands and Denmark, who have adopted clear strategies to increase creditor participation. Ireland was kept from acting. In European bank restructuring policy, small is truly beautiful. I see good reason to demand that European bank supervision and resolution authorities should be headed by representatives from smaller countries, those that have proven that they can do it and are committed to do it.
August 2013: Comment in Handelsblatt on the lack of creditor participation in the Greek bank restructuring program, which has driven up fiscal cost for Greece and increased the risk of future additional sovereign bond haircuts (Deutsch). Back on the envelope I estimate that holders of junior bonds in the four big Greek banks (all distributed via the Channel Islands) will be handed out cash at the tune of EUR 2 billion from the Greek sovereign. Note that once the government is invested in shares with large amounts, as in the Greek case, junior bond holders may lean back and wait for par cash payment. And in the case of dated subordinated securities they will receive coupon payments on top.
Addendum to the July 2013 study publication: In February and March 2013 I was retained by a political party in Bundestag to assess various Cyprus bank restructuring options. A paper was finished in April, available in German language here. It is a precursor exercise to the June/July study covering also Greece and Spain.
IMPORTANT NOTICE: pls visit the new blog of my mentor and friend Klaus Engelen, Banking Union Watch. Klaus is the top senior financial journalist of Germany, a long-term contributor to Handelsblatt and co-editor of The International Economy and the Global Risk Regulator. I cannot fathom how much I owe him for his insights and making contacts within the international public finance community.
July 2013: Study on Creditor Participation in Eurozone Bank Restructurings. This effort has been sponsored by the Green Party in Bundestag and European Parliament. A companion piece is financed by the Center of Financial Studies in Frankfurt and will appear shortly. Neither myself nor certainly the CFS have political party affiliations. But it is good to see that there is interest in such exercises in our parliaments, which have to vote on multi-billion Euro support programs. Yet, high political barriers towards transparency in Europe over banking program cost and their incidence still have to be overcome. So this can only be the starting point of more in-depth empirical reviews.
Some media response: article in der Standard and Sueddeutsche Zeitung on the occasion of the publication of the study (German), and a post in FTs Alphaville blog.
Here is also a presentation that I gave at the Peterson Institute and the IMF's Crisis Management Department on the empirical substance of the bank restructuring study in early June. We had a good time esp over at the IMF.
June 2013: those of you who are interested in Spanish mortgage finance and the subsequent banking crisis may be interested in my ad-hoc presentation given at this years International Housing Finance Course at the Wharton School. I will try to do a more in-depth study on the Spanish crisis, the problem as usual is politics pre-empting access to public funding.
January 2013: Comment on the Eurozone's bank bondholder bailout policies and how they drove sovereign credit into subordination and even default. Use the term 'bond' as economically equivalent with large uninsured deposits, both are legally pari passu in insolvency. The deeper you analyze the actual bailout outcomes - I look briefly into Ireland, Spain and Greece in the piece - the more clearly you fathom the gap between the pitiful current practices that hit too few, and sometimes even the wrong investors, and the grand designs promised every day by Europe's financial policy elite. I cannot see a banking union coming out of this process that is more than a trivial fiscal transfer mechanism, i.e. truly accepted by Europe's banks as a mutual risk management obligation. Publication in CES-Ifo Forum 4/2012.
February 2013: Moodys belatedly decided to perform a U-turn on its sovereign rating methodology and to start downgrading sovereigns that try to socialize debt through inflation rather than actively reducing it. I had argued in my January 2012 Handelsblatt article, english version, in the context of S&Ps decision on France that the rating agencies so far held view that sovereigns should be given credit for being able to inflate debt away was de-facto selecting macroeconomic strategies, rather than evaluating their impact on investors.
What we are seeing currently seems to be nothing less than the beginning of a tectonic shift in rating agency methodology, which in the past had always rejected to consider market risk as what it is: a stealth variant of credit risk. In a low-growth environment the message to policy makers is clear: hard debt restructuring decisions can't be avoided, and it doesn't matter much in that regard whether your country is inside or outside a currency union.
Update October 2013: to the Olivier Blanchard's of this world who demand higher inflation rates and decide to ignore their credit implications. Restructuring can't be avoided for another reason: real debt reduction through inflation only works in a predominantly long-term fixed rate capital market environment. This was the case when the world entered the high-inflation phase of the 1970s. Today, the most vulnerable consumer, corporate and sovereign balance sheets are funded by variable rate lending, with the United States who still enjoy a global borrowing privilege probably being the only exception of relevance. This means that borrowing cost will jump immediately, as investors will try to avoid being taxed through inflation. Where Blanchard therefore ends is not an implicit, but an explicit expropriation strategy as in order to make his proposal work he needs to hold short-term rates low as well. This is realized in corners, e.g. in consumer finance (example refinancing of Euribor loans through the ECB in Spain), but would be rather an innovation for sovereign finance.
December 2012: Presentation given at the Chambre de Notaires de Paris on the German housing market with some reference to the French market. En Francais. Unfortunately, beyond the monodimensional bubble-and-what-can-central-banks-do-about-them discussion we have almost no budget these days to address structural reform issues in housing. Serious housing policy debate in Europe has almost collapsed or never started to begin with when you note that the EU Commission is expressively forbidden by the Treaty to deal with the sector and look around at who sponsors European comparative work. This permits increasingly bizarre tax and fiscal policy distortions affecting the sector, for example my home town Berlin is simultaneously demolishing social housing and starting new social housing programs. The state has more than doubled the property sales tax in the past decade after Germany took the ill-advised decision to regionalize this tax. Increasing policy inconsistencies of this kind seem to be a systemic problem in Europe, adding to systemic banking crisis risk. We finally need a European housing tsar!
October 2012: EBRD-funded study on Mortgage Regulation in Central and Eastern Europe with an empirical focus on Hungary, Romania, Croatia and Serbia. Here is the presentation held at a seminar in Budapest mid-October.
November 2012: EBRD asked me to contribute to their 2012 Transition Report. Box 3.6 page 56-57. My key message is that diverging mortgage banking standards and availabilities of rental housing for young and low-income households create hard to overcome obstacle for Banking Union in Europe in the sense of full mutualization. One key free rider problem would be the invitation to simply keep selling variable-rate loans backed by ECB funding to keep pressing these groups into 'private' housing markets. This ignores the imperative to build or maintain social housing stock in a world with increasing income disparities and rising house price to income ratios in the centers of migration.
FEATURED: my colleague Sebastian Schich of OECD has once again hit home on the subject of implicit guarantees for banking arising not just from too-big-to-fail systemic risk threat but also from the currently seen practices of bank resolution.
Economist quote on the risk of banking crisis amidsts Germany's emerging house price bubble. I have argued elsewhere that German housing market fundamentals are strong, but financial conditions have softened now so much - primarily due to 'Euro angst' as my old colleague at empirica, Rainer Braun, says correctly - that low implied yields become a serious stability risk in some prominent housing market corners. And let's not be fooled by stagnant prices elsewhere: where the turnover is, there is the risk. If this goes on, holding the bag could be once again taxpayers who implicitly guarantee our retail banks that so far - and this in the motherland of Pfandbriefe - refuse to issue long-term bonds to secure low financing cost that could match those low yields. And unfortunately, the Basle III 'Net Stable Funding Ratio' concept is supporting this risk amnesia by assuming that most deposits will roll without repricing risk. Good sleeps over there at the BIS..
October 2012: Why does Germany not take the Polish example and limit mortgage loan maturities to 25 years to stem her house price boom? Ad-hoc commentary (in German). This could be an important precautionary measure, even as German housing lending so far doesn't show much signs of a boom.
Comment regarding Why Germany rejected using direct bank recapitalization for Spanish banks (mostly ex-Cajas). I suggest that the German decision to claw back the results of the June eurozone summit come October must be seen in the context of information constraints over the Spanish banking system, of the way Germany's own bank resolution efforts were handled (lavish subsidies even for junior bond investors), and of the inconconsistency of direct recapitalization with the overall eurozone protection approach in banking and sovereign finance focusing on catastrophic risk protection.
Here is the preceding comment of June 2012 in Handelsblatt focusing on the (politically understandable) attempts of the Spanish government to minimize bail-in at former Cajas facing considerable losses at the expense of European taxpayers. Here is the original longer version, journalists tend to heavily cut back. I argued that direct bank recapitalizations through the ESM/Eurozone would have directly substituted esp. junior bond capital that Spanish regulators allowed to walk out of the door in the months and years prior to the de-facto insolvency of many banks/Cajas in 2012. Most of you have never heard the name of Liberbank, a Spanish Caja merger result, a bank that essentially on Eurozone summit day in late June 2012 proposed to their hybrid capital owners a swap into 5 year deposits (i.e. several ranks upwards) without any haircuts. I demanded in reaction to this situation in Handelsblatt to proceed with Christian Barnier's bail-in proposals, scheduled for 2018, for immediate implementation and for the Spanish sovereign to remain liable to losses vis-a-vis the ESM.
APOLOGIES, FROM HERE THE LINKS DO NOT WORK. I WILL TRY TO FIX SHORTLY.
August 2012: Keith Mullin at IFR Thompson has picked up the amortizing bond proposal here and here, as Ireland has announced amortizing bond issues to fund her National Treasury Management Agency. Also, Chris Whalen has covered the issue in his Institutional Risk Analytics newsletter in August.
Starting to get tired of Eurozone proposals? Here is another one, addressing incentive problems of the European Redemption Fund (ERF) proposal by the Sachverstaendigenrat. In this I call for scheduled amortization for all government debt (the June version is here) issued in the Eurozone, which is the standard practice in finance for other debt funding long-term investment, for instance mortgages. Obviously those that think that governments do not die and debt should be perpetual will not like it. Please read it together with my proposal for a catastrophic / tail risk Eurozone bond insurance scheme run by the ESM, which clearly should impose limits on bond instruments covered. One of the issues I see with the ERF as proposed is a distorted pricing structure, with absolutely no incentive for high-debt beneficiaries to amortize other than Eurozone-imposed law. Or would you voluntarily amortize your cheapest loan? Good luck with enforcing that.
June 2012: Short Zerohedge post on some of the issues facing investors regarding the construction of the Spanish covered bond law. See also my earlier paper on the German Pfandbrief system (German).
Presentation given at IMFs MCM Department on Housing Finance Specialists - Reform or Unwind, as we are faced with dozens of dysfunctional housing finance systems in the overdeveloped world.
April 2012: Short article looking into German house price risk, potential mortgage default drivers and their joint financial determinants, written on behalf of Genopace (B2B platform). There are obviously mitigants, such as Germany's high rental sector share. Problematic however is the impact of low rates on house prices, and in combination with long-term fixing of those rates the high duration gap taken by German banks and accepted by bank regulators (Deutsch).
January 2012: Handelsblatt comment on the rating agencies' sovereign credit rating approach that systematically ignores inflation and devaluation risk for investors, hence creates a policy bias against low-inflation currency zones. Deutsch as published, and slightly longer English version.
An indirect exchange in Handelsblatt with Allianz SE on EFSF partial sovereign bond insurance: my suggestion to focus on a catastrophic loss instead of first loss insurance here, reaction by Allianz followed a week later.
FT Alphaville post on below paper highlighting the challenge for central banks, courtesy Tracy Alloway.