Contributed by Beth Collinge of CTG – a division of ILX Group plc.
The IMF has raised its forecast for global growth this year. Details of the EU’s stress test plan were released Wednesday and European lawmakers gave their backing to an overhaul of Europe’s system for supervising financial institutions and markets. Ernst & Young is to appoint non-executive directors to its global advisory board as it comes under regulatory scrutiny.
- Global equity markets rebounded this week and government bonds fell as fears of a double-dip recession in the US subsided despite some concerns about the outlook for the labour market. Additionally investors were encouraged as details of the “stress test” on banks were released, and news of a surge in German exports in May appeared to highlight the eurozone’s resilience.
- On the broader economic front, the International Monetary Fund raised its forecast for global growth this year, to 4.6 per cent from 4.2 per cent, although it also noted that Europe’s debt crisis posed a risk to the global recovery.
- The policy meetings held by the European Central Bank and the Bank of England this week produced no changes to interest rates as expected.
- The yield on the 10-year US Treasury was up 10 basis points at 3.05 per cent, having fallen below 3 per cent last week for the first time in 14 months.
Mergers and Acquisitions
- Royal Bank of Scotland is preparing to sell up to £3bn ($5bn) of real estate loans made during the property boom in the largest property disposal from its non-core banking business to date. RBS has been working with Lazard to create a structure to sell its vast portfolio of real estate debt.
- Lloyds on Monday sold 70 per cent of the Bank of Scotland Integrated Finance portfolio to a joint venture it has set up with Coller Capital, the private equity group. This is another step towards winding down the legacy of businesses it inherited from HBOS.
- The Bank of England has made nearly £10bn in notional profits by buying UK government bonds as part of a programme – known as quantitative easing – that was designed to expand the money supply in the economy. The gains, which would only be realised were the central bank to sell the bonds back to financial markets at current prices, are a surprising twist in central bankers’ efforts to head off a deeper recession.
- Agricultural Bank of China‘s initial public offering is likely to raise less than the $30bn record-setting total it had hoped for when it sells shares in Hong Kong and Shanghai as early as next month. Analysts said that, judging by investor appetite, the market and details in the prospectus, the bank was more likely to raise a little over $20bn. At that level, the IPO would not be the world’s largest. It had been set to eclipse the record set by Industrial and Commercial Bank of China, which raised $22bn in 2006.
- European regulators on Wednesday released more details of the stress tests being conducted on the Continent’s banking industry, publishing the names of the 91 banks being probed and a broad idea of the stress scenario. The Committee of European Banking Supervisors, the umbrella body for Europe’s banking regulators, said the banks – including 27 institutions in Spain, 14 in Germany and six in Greece – would be subjected “on aggregate to an adverse scenario [that] assumes a 3 percentage point deviation of [gross domestic product] for the EU compared to the European Commission’s forecasts over the two-year time horizon”.
- However, the CEBS did not reveal the nature of the stress test for the banks’ sovereign debt holdings, the biggest area of concern for investors. Transparency on this and other measures has been intensely controversial, particularly for Germany, whose public-sector Landesbanken are among the weakest banks in Europe. It is predicted that between 10 and 20 of the 91 banks being tested could fail to pass the hurdle tier one capital ratio of 6 per cent. The CEBS said the results would be published on July 23.
Also on Wednesday, the European parliament enacted legislation to adopt the world’s toughest restrictions on cash bonuses to bankers: under the new legislation banks will be required to limit upfront cash, defer large bonuses, and link pay-outs to long-term performance. National regulators are supposed to have the rules in place in time for this winter’s bonus season.
- In addition on Wednesday, European lawmakers gave their backing to a radical overhaul of Europe’s patchy system for supervising financial institutions and markets. The package would involve setting up a European Systemic Risk Board to monitor high-level risks to the bloc’s financial system; plus three European Supervisory Authorities (ESA) to co-ordinate the regulation of the banking and insurance sectors and the securities markets. Day-to-day supervision of individual institutions would remain with national regulators. EU officials would like the new ESAs to be up and running in early 2011.
- Ernst & Young, the “big four” auditor, is to appoint non-executive directors to its global advisory board for the first time as accountancy firms come under mounting regulatory pressure over governance. The decision by E&Y, at the centre of regulatory scrutiny over its audit of Lehman Brothers, which collapsed in 2008, comes in response to an audit code that was issued this year. It also follows a report last week from the UK Financial Services Authority that accused the audit profession of a “worrying lack of scepticism” in its dealings with some bank clients ahead of the crisis.
- Kohlberg Kravis Roberts (KKR) is planning an ambitious flotation on the New York Stock Exchange, expected to value the buy-out fund at $9bn (£5.9bn). The firm, best known for its £11bn takeover of Alliance Boots in 2007, had planned to float three years ago, but market conditions were not suitable. The company hopes to raise $500m through a share issue in the months after the flotation in order to create permanent capital and reduce its reliance on the cyclical buy-out business it is currently focused on.