Category: banks

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Happy New Year and Some News

1 January 2024

Happy New Year to everyone!

We trust you all had a nice Christmas break and raring to go in 2024.

A couple of bits of news from us.

First, our article “Arbitrage Problems with Reflected Geometric Brownian Motion” has just been published. The full reference and the Open Access link is given here:

“Arbitrage Problems with Reflected Geometric Brownian Motion.” (D.E. Buckner, K. Dowd and H. Hulley) Finance and Stochastics (2023) 28: 1-26.

We will have more to say on reflected GBM processes soon, as Annals of Actuarial Statistics, the journal that published Guy Thomas’s devastatingly flawed articles on the subject, seems to think it is OK to published flawed models that could bankrupt a company that uses them, without allowing anyone (i.e. us) to make any comment to that effect in its hallowed pages. This is like a maths journal that publishes an article saying that 2 plus 2 equals 5, and that’s OK because 2 plus 2 equals 4 is merely an opinion and other actuaries might have a different opinion.

We will how well that opinion holds up in due course. We have a cunning plan to address this issue.

Second, my new book on free banking is out. The link is:

The Experience of Free Banking, second edition.

There is a blog on it here, which also explains what free banking actually is.

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The Crisis to End all Crises

The Financial Times reports:

In a letter to UK bank chief executives, the BoE said its analysis of the circumstances of the Archegos failure had found “significant cross-firm deficiencies” in the way bank prime brokerage businesses allowed the fund to build up huge loans that it ultimately defaulted on.

Interesting. Perhaps our UK Shareholders’ letter had some effect! Or was it Eumaeus, who wrote.

We should also keep in mind that the regulatory models are calibrated to give a 1 in 1,000 years probability of default, so the suspicion arises that the models might not have been calibrated properly. In any case, it would be wise for Bailey and his fellow regulators overseas to look into this issue. Granting a little time to investigate, Bailey then needs to make a statement that he is either confident in the effectiveness of UK regulation in this regard or he is not: the Archegos/Credit Suisse episode is a warning shot across the bow.

?

It now looks as though he is not “confident in the effectiveness of UK regulation in this regard “.  Oh dear. We thought the new and improved system of regulation would make the GFC the “crisis to end all crises”. But I am sure they will sort it all out.

[EDIT] The corresponding Dear CEO letter from Nathanaël Benjamin is here.

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Are UK banks really as strong as the Bank says?

Youtube this morning.

With the economy undergoing the biggest downturn since 1709, it is natural to ask if UK banks are strong enough to withstand this downturn and still function normally. The mood music coming from the Bank of England has certainly been reassuring. But are UK banks really as strong as the Bank says?

The answer, sadly, is no. In this video, Professor Syed Kamall (IEA Academic and Research Director) chairs a discussion with Dr Dean Buckner and Professor Kevin Dowd, who authored a recent IEA Discussion Paper “How Strong are British Banks: and can they pass the Covid Stress Test”.

Professor Dowd and Dr Buckner argue that Banks are more fragile now than they were going into the last crisis. The Bank of England’s failure to ensure the resilience of the banking system suggests a need for radical reform that does away with the regulator.

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Lenders more fragile than before crash

The Times mentions today a report by the Institute of Economic Affairs dismissing claims that banks are strong enough to survive a more severe financial crisis than the last one.

Kevin Dowd and Dean Buckner, the authors, say that acute pressure on banking stock prices “contradicts” the central bank’s conclusions that they are adequately capitalised. “The Bank of England’s claims that UK banks are so strongly capitalised after the global financial crisis they could go through an even worse event and still emerge in good shape do not hold water.”

Oh dear.

The report is here.

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UK Banking System is One Big Impaired Asset

An interesting passage from the IFRS accounting standards

The core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash flows individually (known as cash-generating units). [My emphasis]

IAS 36 applies to all assets except those for which other standards address impairment. The exceptions include inventories, deferred tax assets, assets arising from employee benefits, financial assets within the scope of IFRS 9, investment property measured at fair value, biological assets within the scope of IAS 41, some assets arising from insurance contracts, and non-current assets held for sale.

Continue reading “UK Banking System is One Big Impaired Asset”

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Can UK Banks Pass the COVID-19 Stress Test, Updated

Dean and I have updated our banking report, and the new version is available here.

The new version gives figures updated to May 29th and is a little trimmed down. Its main highlight is a new Figure 1 which gives UK banks’ share prices since the start of 2007

UK Bank Share Prices Since the Beginning of 2007

and is based on Howard Mustoe’s lovely share price chart in his BBC report “Are Britain’s banks strong enough for coronavirus?”

The exam question is: Explain how this Figure shows that UK banks are well capitalised.

Answers to Sam W, c/o Bank of England, Threadneedle Street, London EC2R 8AH.

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The Bank’s ‘No Stress’ Stress Tests, 2019 Edition

In my earlier writings (here, here, here and here, for a start) I may have given the impression that I am not a great fan of the Bank of England’s so-called stress tests, mainly because the Bank’s stress scenarios barely break into a sweat.

My skepticism was heightened further when a little birdie from Moorgate suggested that the stress tests were really designed to ensure that the big institutions passed, ‘cos otherwise there’d be problems.

I had long known that the exercises had zero credibility, but even so, it comes as a bit of a shock to learn that people on the stress test team were more cynical about them than I was.

So now we know what I had long suspected: the stress test project is one big con job PR exercise to sell the Bank’s ‘Great Capital Rebuild’ fairy story to the public.

Continue reading “The Bank’s ‘No Stress’ Stress Tests, 2019 Edition”

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More Market Value Nonsense from the Bank

In his opening remarks to the Treasury Committee on May 20th, Governor Bailey made an interesting observation point about market values:

 … had you done a stress test in the run-up the financial crisis on the market value, you would have been doing it on the market values that were trading well in excess of book values, so … that would of course have severely misled you. You would have concluded there was no problem and you would obviously have been badly wrong. (Our emphasis)

Mr. Bailey isn’t the first Bank spokesman to make this claim. The Bank’s head of financial stability Alex Brazier said as much in almost the same words back in January 2017:

… if you had [relied on market cap values] before the crisis, you would have been led completely astray … You would have been led to the conclusion that the British banking system was remarkably resilient, and, as forecasting errors go, that would have been quite a good one. 1

It’s an important point, but it is wrong. Flat out wrong.

It’s a shame that none of the MPs challenged it.

Continue reading “More Market Value Nonsense from the Bank”

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Are Britain’s banks strong enough for coronavirus?

Howard Mustoe’s article on banking strength is here.  Quite long, but worth it (of course!).  It quotes Durham University Professor Kevin Dowd and former Bank of England regulator Dean Buckner saying the most appropriate capital measure is a market value one, which is based on banks’ share prices.

This is calculated by multiplying the number of shares in issue by the current share price. They prefer this measure because share prices are an up-to-date reflection of what investors think a company is worth, whereas the banks’ reported figures are not.

True, although other miserable people say to focus on book value.

Continue reading “Are Britain’s banks strong enough for coronavirus?”