Friday, August 22, 2008

Banks - Where does the buck stop?

In talking about banks some figures are worth considering,

  • Fresh capital raised by banks and brokerage houses since January 2007 - $357 billion

  • Write offs to date - $500 billion

  • Anticipated additional write offs – this is a very suspect figure and possibly on the low side - $650 billion

    As you will see the total write offs are way beyond additional capital raised to date.

    A few possible scenarios

    • Western Banks will have to raise further additional capital by way of rights issues, or a placing with Sovereign Funds in the Middle East or Asia. A possible result from the latter is more control passing from West to East.

    • Can Banks continue to pay or, even more ridiculously, increase dividends against this background?

    • If dividends are cut - who suffers? The shareholders of course! So they face a triple whammy – lower dividends, a possible call for capital and a decimated value of their shareholdings.

    • Regulation must be tightened but at what cost?

    • Regulators to date have shown little ability to regulate and, in some jurisdictions, the legislators have compounded this failure by buying into the absurd requests from the self same banks who are now writing off these huge sums of shareholders wealth.

    • Who regulates the Regulators? In effect nobody and if they fail in their duties or don’t see the warning signs in time - who suffers? Businesses, the shareholders and the ordinary person who needs a mortgage or a loan.

    Central Banks

    We talk about the Central Bank of Ireland or other Central Banks in the Euro Zone but in effect they have little power and are merely Agencies of the European Central Bank.

    As we pointed out in an earlier post, Ireland has little control on its Interest or Inflation Rates as borrowers will be only too well aware. In turn the ECB rate has little relationship to rates being charged by Banks in Ireland or other European countries.

    An extract from the website of the CBI perhaps puts this in greater perspective:

    Financial stability is an abstract concept that defies measurement and is often defined by its absence – the occurrence of a financial crisis. The bank’s role involves both domestic and international developments and highlighting potential areas of concern relative to the Irish financial system.

    And now for the early Warning on US Banks – have we such a menu for Europe?

    This is reprinted with thanks to Martin Weiss Ph.D of money &**

    Banks are listed with the largest at the top.

    Column B is's Financial Strength Rating, which covers capital, asset quality, liquidity, earnings and more. This is a key input in helping us form our opinion, but not the only input.

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