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Cocos and bank capital: a belated explainer

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A few weeks ago, in a piece about Deutsche Bank's recent difficulties, I commented about its use of so-called "coco bonds" - contingent convertible bonds. I had over-simplified my description, and was promptly taken to task for doing so by @creditmacro on Twitter. He provided me with a detailed explanation of what coco bonds are and how they work. This piece draws heavily on his input. All of the quotations are from him unless otherwise stated. His full write-up can be found in Related Reading at the foot of this post. 
I'm also indebted to Martien Lubberink for pointing me to the capital structure diagram. 

In the aftermath of the financial crisis, regulators around the world recognised that banks were insufficiently capitalised. The proportion of equity (shareholders' funds) on the liability side of their balance sheets was distressingly low, which exposed their creditors - whose claims make up the rest of the bank's liabilities - to the risk of losses in th…

HSBC: the Don Giovanni of banks?

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HSBC's results were bad. But they could get a whole lot worse. The list of lawsuits they are facing resembles Don Giovanni's catalogue of conquests, as eloquently explained by his accomplice Leporello. Don Giovanni was, of course, eventually sent to hell as retribution for his crimes. Will HSBC, too, be consigned to fire and brimstone? Somehow I doubt it...

My Forbes piece on HSBC's catalogue of lawsuits is here.

And if you like Mozart, Leporello's "catalogue aria" is here. The Italian words and English translation are here.


Don't blame the boomers

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From Joe Sarling's blog comes this a lovely chart showing housing affordability by cohort since 1955:


As can be seen, the current generation of young people - Generation Y - faces paying a far higher proportion of their incomes in mortgages or rent than any previous cohort. This does not, of course, take into account the considerable price difference between London and everywhere else: if London were excluded, I suspect their position would not look quite so dire. Nonetheless, this chart is distinctly worrying. Such a high proportion of income spent on housing costs is not remotely sustainable.

But that is not what interested me about this chart. What is far more interesting is who really benefited from the increase in house prices since 1960. Contrary to popular opinion, it's not the baby boomers. It's the cohorts immediately before and immediately after them - Generation X, and (above all) the inter-war generation. Yes, those poor old people who grew up in the Depression…

The problem with words

Ah, those pesky words. They do not mean what we think they do. And sometimes we say one thing, but people think we mean another. 
And so it is that David Glasner, in a beautifully crafted takedown of my previous post, has managed to miss my point entirely.

I did, in fact, read carefully all of David's quotation from Ralph Hawtrey, though I did not quote all of it. Hawtrey's point is that what appeared to be destructive competitive devaluation as countries left the gold standard was in fact beneficial loosening of domestic monetary policy. His fishing fleet did indeed all come safely into harbour, eventually.

This was also my point, and the reason why I highlighted Hawtrey's gold standard thinking. Hawtrey understood that in a gold standard system, loosening domestic monetary policy must involve deliberate devaluation versus gold. Indeed in any fixed currency peg system, monetary loosening requires explicit devaluation versus the commodity or foreign currency to which the …

Competitive devaluation is not a free lunch

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It's not often I disagree with David Glasner. Or, for that matter, with Ralph Hawtrey. But I fear I have to take issue with both of them over competitive devaluation. "Bring it on", says David. No, please don't. It's a terrible idea.

Hawtrey's pictorial explanation of why competitive devaluation is a good idea seems both charming and plausible:
This competitive depreciation is an entirely imaginary danger. The benefit that a country derives from the depreciation of its currency is in the rise of its price level relative to its wage level, and does not depend on its competitive advantage. If other countries depreciate their currencies, its competitive advantage is destroyed, but the advantage of the price level remains both to it and to them. They in turn may carry the depreciation further, and gain a competitive advantage. But this race in depreciation reaches a natural limit when the fall in wages and in the prices of manufactured goods in terms of gold has…

Negative rates and bank profitability

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Banks are complaining. "Negative interest rates hurt our margins," they moan. Here's Commerzbank, for example, in its recent results announcement(my emphasis):
Mittelstandsbank attained a solid result in a challenging market environment. The operating profit declined in the 2015 financial year to EUR 1,062 million (2014: EUR 1,224 million), yet remains at a high level. The fourth quarter accounted for EUR 212 million (Q4 2014: EUR 251 million). The full year revenues before loan loss provisions declined to EUR 2.7 billion (2014: EUR 2.9 billion). This development is due in particular to the downturn in deposit transactions, which was driven by the negative level of interest rates on the market as well as the depreciation of a shareholding.  And here is Danske Bank's CFO Heinrik Ramlau-Hansen, quoted in Bloomberg:
“There are considerable costs associated with negative rates. In 2015 alone, narrowing deposit margins resulted in a cost of more than 2 billion kroner ($30…

The trade effect of negative interest rates

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Yesterday, HSBC prepared the ground for imposing negative rates on business depositors. This is an excerpt from HSBC's letter announcing the necessary change to the Terms & Conditions of HSBC business accounts:


Now, this requires some explanation. Firstly, the change applies only to BUSINESS accounts. Retail depositors are unaffected. Secondly, it applies only to currency accounts, not sterling accounts. And thirdly, despite HSBC's mention of "negative rates set by central banks including the European Central Bank", the relevant "policy or reference rate" at present is still positive everywhere except Sweden, where the policy rate is currently -0.35%.
Central banks set several interest rates, of which only one is the so-called "policy rate". The policy rate is usually the rate at which the central bank will lend to banks against good collateral: it is the benchmark not only for the interbank lending rates (Libor, Euribor and their relatives), …

What they really want

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As Henry Tapper puts it, today is WASPI day. Today is the day that "Women Against State Pension Inequality" get the Westminster debate for which they have campaigned.

Eh, wait? Wasn't there a debate on this back in early January?

Yes, there was. It was a backbench motion proposed by the SNP MP Mhairi Black. It called on the government to re-examine the acceleration of the equalisation of women's and men's pension ages in the 2011 Pensions Act, which added up to 18 months to the state pension age of some women born in the 1950s:
That this House, while welcoming the equalisation of the state pension age, is concerned that the acceleration of that equalisation directly discriminates against women born on or after 6 April 1951, leaving women with only a few years to make alternative arrangements, adversely affecting their retirement plans and causing undue hardship; regrets that the Government has failed to address a lifetime of low pay and inequality faced by many w…