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In Case You Missed It: Business News Round-Up

Beth 005Contributed by Beth Collinge of CTG – a division of ILX Group plc.

The Basel Committee on Banking Supervision revealed new capital requirements. The Bank of England kept interest rates unchanged. Yields on peripheral eurozone bonds rose with renewed sovereign debt issuance. A Beige Book survey revealed economic growth mixed or slow in USA.

Economic Backdrop

  • Global equity and oil prices made modest gains while core government bonds and gold eased back.
  • Plans by Deutsche Bank to raise over €9bn unsettled the equity market on Friday ahead of the weekend’s Basel Committee on Banking Supervision summit, that set fresh capital requirements for the sector.
  • This week there were also claims that July’s “stress tests” on Europe’s banks had understated some lenders’ holdings of potentially risky sovereign debt. The spread of peripheral government bond yields over German Bunds widened sharply in the early part of the week – to record levels in the cases of Portugal and Ireland – prompting fresh buying by the European Central Bank. Economic data from Germany appeared to suggest that the strong growth seen in the eurozone’s powerhouse in the second quarter of the year might be tailing off.
  • The US Federal Reserve released its snapshot of the economy, which showed “widespread signs” of slowing in recent weeks. The Fed said in its Beige Book survey of businesses that three of the 12 districts questioned said economic growth was mixed or slow.
  • The Bank of England left interest rates and the level of quantitative easing unchanged as expected, after recent economic signs pointed to a relatively robust recovery.
  • During the week the euro ground against the dollar, and against the pound.
  • The Canadian dollar was given an extra boost when the Bank of Canada raised interest rates by 25 basis points to 1 per cent after its policy meeting on Wednesday, but the Reserve Bank of Australia kept interest rates on hold at its policy meeting on Tuesday, citing fears over a global slowdown.
  • In commodities, oil was trading above $76 a barrel late on Friday, up from $74.60 a week earlier, although it eased back in choppy trading. Gold rose to within a whisker of its June record high of $1,265 but eased back to $1,247 as risk aversion faded.
  • China’s trade surplus dropped in August after imports grew at a faster rate than expected, an indication that domestic demand could be rebounding after several months of slowdown.
  • Beijing allowed its currency to appreciate by 0.5 per cent this week, taking the total increase in the value of the renminbi to 0.95 per cent since it abandoned the dollar peg in June.

Financial Institutions

  • The Irish government has made the decision to formally separate Anglo Irish Bank’s troubled property loans from its customer deposits. Under a new restructuring plan for Anglo Irish, one of the biggest victims of the Irish property slump, its saving book will be split off and turned into a so-called “funding” bank. This will be owned directly by the Irish finance ministry and will continue to take deposits but will not provide any new lending. The bank’s loan assets will be held separately and sold or wound down over time. The decision to split the bank followed a cabinet meeting to discuss the plight of the property lender, which has already received €23bn in state aid to stay afloat. If European regulators allow the split to happen, Anglo would stop lending to the UK market for at least five years. It could also be asked to wind up its UK retail deposit book. Anglo holds around £2.5bn of high street cash from the region.
  • On Sunday Deutsche Bank announced a €9.8bn rights issue, as Germany’s biggest bank moved to strengthen its capital base. Deutsche also issued a tender offer of €24-€25 a share for the shares in Postbank that it does not already own. Deutsche currently owns 29.9 per cent of Postbank. Deutsche’s rights issue, which would rank as the biggest by a European bank this year, compares with its current market value of €30bn.
  • Santander, the Spanish bank, agreed to pay 11.66bn zlotys (£2.46bn) to purchase the 70 per cent stake of Bank Zachodni WBK, one of Poland’s largest banks, that Allied Irish Bank has been forced to sell as a condition of the state aid it has received from the Irish government.
  • Goldman Sachs was fined £17.5m by the UK’s financial regulator following a five-month investigation into the investment bank’s international business initiated in the wake of fraud charges against the company in the US. The FSA opened its investigation into the bank in April after the SEC charged Goldman with misleading investors in a complex mortgage-backed security known as Abacus. The SEC claimed that Goldman had failed to disclose that a hedge fund, that was betting against the security had selected some of the mortgage loans included in the portfolio, and fined Goldman $550m in July.
  • Barclays confirmed Bob Diamond, head of its investment bank, as its next chief executive. Mr. Diamond, a former teacher, will take over from John Varley at Barclays’ annual meeting next March. Mr Varley will become a senior adviser to the board on regulatory issues until September 2011.
  • Barclays chairman Marcus Agius announced he would step up to chair the British Bankers’ Association after HSBC chairman Stephen Green resigned to take up a new appointment as UK minister for trade and investment. In his new role, Agius will support BBA chief executive Angela Knight.
  • Stephen Green, HSBC chairman, is set to become trade minister, one of the most influential ministers in government. Mr Green has been charged with boosting British exports and attracting inward investment, but his role is likely to extend to banking reform and migration policy. His abrupt departure from HSBC has triggered a hurried search for a successor.
  • Citigroup is at the centre of a dispute among analysts and accounting experts over whether it should set aside funds to cover $50bn of deferred taxes, a move that would reduce its capital buffer and weaken its balance sheet. The assets, a product of the accounting principles applied by US tax authorities to companies, are crucial to Citi’s financial health. At the end of the second quarter, deferred tax assets (DTAs) made up more than a third of Citi’s tangible equity – a measure of balance sheet strength. Under accounting rules, Citi has to be confident it will earn $99bn in taxable income during the next two decades to avoid making provisions for DTAs. In the 2002-2006 period, Citi had annual pre-tax profits of at least $20bn. Citi accumulated DTAs partly because of its huge losses during the financial crisis.

Credit

  • There was a renewed round of sovereign debt issuance as eurozone countries stepped up their borrowing to fund their economies. Reports suggested that eurozone governments would look to raise €80bn in September compared to €43bn in August. This fuelled renewed concerns over the ability of countries on the periphery of the eurozone to service their debt and took the spread of the yields of Irish and Portuguese government bonds over their German counterparts to record levels, surpassing the highs seen at the height of the eurozone sovereign debt crisis in May. Indeed, there was even speculation that Ireland might have to make use of the European Union’s bail-out fund. The European Central Bank stepped in to shore up the eurozone government bond markets in what appears to be its biggest such intervention since early July. Yields on Greek bonds rose to levels last seen before the €750bn emergency rescue package was launched to avert the collapse of the eurozone bond markets in May. The ECB has bought €61bn in government bonds – mostly of the weaker eurozone economies of Greece, Ireland and Portugal – since it launched its intervention programme on May 10 as part of the multibillion-euro international bailout.

Other

  • The central bankers and heads of supervision from the 27 member countries of the Basel Committee on Banking Supervision met Sunday to debate both how much capital banks worldwide will be required to hold against losses and when they will have to reach the new standards. The reform package, known as Basel III, is expected to include a new minimum core tier one ratio for banks worldwide. This vital measure of bank safety compares a bank’s equity plus retained earnings to assets, adjusted based on risk. The Basel group was working off a proposal that called for a new minimum of 4½ per cent. They also wanted to add, for the first time, an additional buffer of 2½ per cent, for a total of 7 per cent. Banks within the buffer zone would face restrictions on their ability to pay dividends and discretionary bonuses. There is widespread consensus that the process should be implemented in stages, with the minimums brought in first, followed by a longer period for the buffers.
  • The Bank of England’s monetary policy committee kept interest rates at a record low level of 0.5 per cent and quantitative easing – the policy of buying government bonds to encourage spending – at £200bn ($308bn), or about 14 per cent of nominal GDP. Recent figures have suggested the UK economy is rebounding strongly – second- quarter growth was the highest since 1999 and employment levels grew by the most since 1989. Inflation seems to be persistently above the 2 per cent target, although it fell in July and is down substantially from an April high. The Bank believes that inflation is largely above target because of the short-term effects of a VAT rise in January and a weak pound driving up the prices of imported goods.
  • EU diplomats and lawmakers agreed to a radical overhaul of the existing system of financial oversight, soon to be endorsed by EU ministers and the European parliament. By January 2011, three new European supervisory authorities (ESAs) should be operational, as well as a new European Systemic Risk Board, to warn on threats to financial stability. Day-to-day supervision of companies and markets will remain with national authorities, and the main task of the ESAs will be to draw up common technical rules and standards – for example, on bank capital – to augment the broader regulatory framework. The ESAs will acquire legally binding powers in only limited circumstances, notably, if member states agree there is an “emergency situation”. Even then, the ESAs cannot enforce decisions that have budgetary implications.
    The European Systemic Risk Council, made up mainly of central bank governors, will be based in Frankfurt: its key role will be to warn about macroeconomic threats or risk building up in the EU. It will not have the power to force decisions on member states.
  • The three new European supervisory authorities, which will be created from existing EU committees, will be made up of national supervisors. They are the:
    • European Banking Authority, based in London
    • European Securities and Markets Authority, based in Paris
    • European Insurance and Occupational Pension Authority, based in Frankfurt
  • At the meeting in Brussels, finance ministers also agreed to submit national budget plans to the European Commission and other EU governments for vetting – a move aimed at strengthening governance across the 27-country bloc in the wake of the Greek crisis.
  • The ministers also discussed a proposal from Michel Barnier, EU internal market commissioner, which envisages a pan-European network of bank levies. Under the commissioner’s plan, proceeds raised from these would be used to establish nationally based “bank resolution” funds, to help bail out ailing banks in the future. Also on the table, however, was a broader paper from the European Commission’s tax officials on the merits of taxes on financial transactions or on financial activity. The latter could be levied on profit and remuneration at financial firms, or on returns from risky activities. A financial activity tax would make financial services more expensive and cut the size of the financial services sector. France, Germany and the UK are already committed to introducing bank levies based on bank assets, but only Germany is willing to dedicate funds raised to future bank resolutions. The UK is adamant that proceeds should go towards general budgetary needs.
  • Grant Thornton has become the first major UK auditor to respond to new governance rules by announcing the appointment of independent non-executive directors to help oversee its business. The UK’s biggest audit firms were told in January to appoint non-executives as part of a new governance code drawn up at the behest of the Financial Reporting Council, a City regulator. The obligation is designed to reduce the risk of an auditor collapsing, while also bringing the firms’ governance more into line with the rules followed by publicly listed companies.
  • The quarterly reshuffle of the FTSE 100 took place Wednesday 8 September after the market close. Insurer Resolution, pumps manufacturer Weir and engineer Tomkins are replacing Home Retail, Segro and Cable & Wireless Worldwide. The changes will come into effect on 20 September. The quarterly review ensures that the UK’s leading blue-chip index is updated to reflect the changing market capitalisation and liquidity of Britain’s listed companies. Firms outside the FTSE 100 that grow to rank among the 90 largest by market capitalisation are automatically promoted, while FTSE 100 firms with the lowest values, or any that have fallen to the 111th spot or below, drop into the FTSE 250.
  • De La Rue, the world’s largest banknote printing company which is involved in producing more than 150 national currencies, has called in fraud investigators after revealing that some staff had “deliberately falsified” quality tests for more than one of its customers. The UK company also quantified for the first time the extent of the problems that it first made public seven weeks ago, disclosing that annual pre-tax profits were on track to be at least a third lower than analysts had previously expected.
  • Robert Chote was chosen by George Osborne, chancellor, to take over from Sir Alan Budd and chair the Office for Budget Responsibility for five years, so long as his appointment is approved by MPs on the Treasury select committee. In his new role, Mr Chote is likely to usher in a shake-up of government forecasting, placing greater emphasis on uncertainty and the consequences for the public finances of possible economic shocks.

Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.

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