Gustavo Ballvé on November 17th, 2011
Banks, Corporate Strategy, Diversified financials, Food for thought, Home, Investment Themes, Mental models, Portfolio Management, Risk management, Signal or Noise

The IMF has recently issued a report on China’s financial system’s stability that has grabbed plenty of headlines, and yet today it seemed that there were pessimistic articles about banking all over the world. European and US banks are also the subject of stories that highlight risk, interconnectedness, poor balance sheets and so on. While the financials’ situation isn’t necessarily news, it is the trend that’s interesting. Inside we collect quite a few articles about the world’s financial system, all of them very from yesterday or today (H/T’s Dealbook). Collectively they plant a bleak picture, one that seems very different from what we (still) observe in Brazil’s banking system. It’s very hard to separate signal from noise, especially so in the middle of a crisis, but it’s great food for thought.


The real risks to China’s financial system – – Two articles supposedly debate the IMF report, but it turns out their opinions aren’t that much divergent. We’ve read calls for opening up the system, and we remind the readers that when the incentive systems of enough players are aligned towards a given direction – in this case, growth, then whether it’s centralized or open doesn’t matter as much. One such example was the US housing boom and subsequent bust: oversimplifying a bit, one can argue that all players were aligned towards growth: home owners, mortgage originators/ packagers/ distributors, banks, investors, credit rating agencies etc. – and, on top of them all, the government and its agencies. The fact that the system was open, competitive and so on didn’t help much. In China, the incentives to grow are still strong and the Central government is yet to pull on the reins strongly enough. It’s not necessarily true that an open system would be better incentivized to slow down.


Banks face funding stress – – European banks need funding, most of it nowadays comes from the ECB due to higher perceived risk. So banks needing collateral accepted by the ECB enter strange swaps with funds and investment banks to get such “risk-free” assets at a discount to the, well, not-collateral-level assets they’re swapping with the other players. Is this spreading the risk or creating even more connections where there shouldn’t be many?

UniCredit bombshell shouldn’t be the last one – Bloomberg – UniCredit, one of Italy’s largest lenders, has recognized 10.7 billion euros in asset writedowns in its latest report. Even so it’s still trading at 0.29x book value, and that book value is propped up by “useless” assets such as deferred taxes (good luck turning a profit to use this asset) and goodwill (good luck trading goodwill for cash). Other european banks trade at P/B multiples that suggest their credibility is also way down. However, the author argues the problem could be global and that, if banks start getting as candid as UniCredit, things could get rather unpredictable.


Fitch’s warning spooks investors – — AND — US Banks face contagion risk from European debt – Bloomberg – Credit rating agency Fitch has issued a report (for subscribers only) on the “serious risk” that US banks may face if the situation in Europe deteriorates much further. As in France being at risk, for instance. While again it’s a case of “not much new information”, the fact that they chose to go on record – even though they didn’t change the ratings of any of the US banks mentioned – has spooked investors (US banks down by 3-4% as we write, with the notable yet unsurprising exception of Wells Fargo – still down by 1%).

Why not break up Citigroup? – NYT’s Economix blog – Simon Johnson, former IMF chief economist, links to the Dallas FED president’s speech on “too big to fail” banks and agrees with him that such institutions should be broken down into smaller pieces. He suggests starting with Citigroup.

‘Aloha’ to a new fix-it job – – coincidentally, the has a profile of Michael O’Neill, the new Chairman of Citibank N.A. (not Citigroup, “just” the bank – i.e. 70% of Citigroup’s assets). Certainly an impressive profile, but we’re reminded of Warren Buffett’s axiom: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”


Finance job losses near 200,00 as BNP, Citigroup trim employees – Bloomberg – Well, partially playing to Mr. Johnson’s wishes above, the banks are reducing their size – does involuntary reduction count?

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