Chinese overnight repo rates fell back below 5%, the take-off point for the liquidity crisis last month. The PBOC plans to maintain a tight money stance indefinitely in order to stop the growth of the shadow banking sector. One of the unintended consequences of this policy is increased market volatility. Let’s hope the PBOC knows what it is doing, because if it loses control of rates all is lost. Actually, do any of these central banks know what they’re doing?
Bad loans are rising at an unprecedented pace in Italy. Almost 15% of all loans are now classified as non performing, but there is no reason to panic. The Bank of Italy is on the job supervising and regulating making sure that the banks have enough capital.
To make matters worse, Italian banks are stuffed to the rafters with Italian government bonds. Nothing has been done to break the pernicious link between the Italian government and its banks. If the banks go bad, they will not longer be able to support the government by buying its debt. If the government goes bad, all of that government debt will need to be written down killing each and every bank all at once.
The banking system and the government are like two drunks holding each other up as they stumble down the street. Either they both keep going, or they both pass out on the sidewalk.
Let me start by removing the mainstream media’s spin from the housing reports. As you can see, for all the hype about a housing recovery prices have reattained their 2004 prices unadjusted for all of that inflation from the last nine years.
Moreover, high prices are only good for homeowners. Those wishing to purchase a home must pay inflated prices that will not be sustained once the Fed is unable or unwilling to continue printing money. The recent rise in mortgage rates will take some of the froth out of the market, but then the Fed will be asked to do more.
Both of these banks are well within TBTF territory with balance sheets over half the size of their host country’s GDPs. I am not so sure that there is enough capital in the world to account for the huge risks these institutions have taken. DB is the largest holder of derivatives in the world followed closely by Barclay’s. A few billion dollars, euros, pounds are quatloos will not make a difference when the bank has several trillion dollars in derivatives exposure. From recent experience with capital injections dating back to the GFC in 2008, once a bank’s balance sheet begins eroding, it does not stop until it becomes insolvent.