Keeping an eye on things
From the Just Group 2020 interim:
There has been significant academic and market debate concerning the valuation of no negative equity guarantees in recent years, including proposals to use risk-free based methods rather than best estimate assumptions to project future house price growth.
To be sure, there has been significant debate about the subject, but there still seems to be significant confusion about what the debate is.
Just Group interim out today, with an upbeat commentary that pleased the analysts. Who are easily pleased, it seems.
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.
The National Bank of Belgium (NBB) has asked re/insurers not to pay dividends until at least 1 January 2021. The decision came after the European Central Bank extended its recommendation on 28 July for banks not to pay dividends until January 2021.
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.
InsuranceERM reports today on “Covid-19’s consequences for solvency, stress and scenario testing”.
Behind a paywall, but the gist is as follows.
The Treasury Committee made the fatal mistake in their June letter of asking Andrew Bailey how the PRA it can determine that bond spread widening is the effect of illiquidity not anticipated defaults. NEVER ask a regulator how or why it has determined something, for then it will tell you in a way that means nothing.
See here for this letter of 29 June (but only just published) from Andrew Bailey, Governor of the Bank of England, to Mel Stride, chair of Treasury Committee, in reply to Stride’s letter of 10 June with questions following on from the Treasury Committee evidence session on 20 May.
It really is the most astonishing thing I have ever seen coming out of the Bank, and there is material for many posts. But I will start with the weirdest one.
Just published, “Valuation of no-negative-equity guarantees with a lower reflecting barrier” by our friend Guy Thomas (University of Kent at Canterbury).
Another great piece on insurance accounting from the Eye this week. As we always say, support great investigative journalism and buy a copy, but the crux of the article is our longstanding claim that the potential costs of no-negative-equity guarantees have been drastically understated.
Apparently there have been complaints about this since October 2018 to the Financial Reporting Council (FRC), the accounting regulator. After nearly two years, ‘the dozy regulator’ has finally addressed the point, concluding that “the guarantees should be valued at what they would sell for in the market, and since most equity release providers who might buy them (they wouldn’t, in reality) all value them in the same way, there’s no problem!”.
The FRC did not ask shareholders or policyholders what value they might place on these products, of course.
“If and when the final reckoning comes for the life insurance companies, as it did for Equitable Life 20 years ago, it might well be the bean-counting that does for them.”
We shall see.