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Banking on the next #FinancialCrisis

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A series of scandals and setbacks in the banking sector in Europe and elsewhere threaten to undermine public confidence in the industry. While there is considered little chance of an economic downturn on the scale of the 2008 banking crisis, there is concern that recent events in the sector could reverse efforts made to restore trust in banking. Arguably the most serious recent development was the decision by Deutsche Bank to lay off 18,000 staff, one fifth of its global workforce, as part of a huge restructuring plan. DB Chief Executive Christian Sewing hopes the €7.4 billion plan will turn around the bank, whose shares hit a record low last month, writes Colin Stevens.

The bank’s travails have reignited fears of a possible repeat of the 2008 crash which was the greatest jolt to the global financial system in almost a century – one that pushed the world’s banking system towards the edge of collapse. The big concern, according to experts, is that governments do not have the policy tools they had in 2008 to prevent a financial shock turning into a freefall, and overall debt levels are higher than during the previous crisis.

Harvard University Professor of Public Policy and Professor of Economics and former chief economist of the IMF Kenneth Rogoff said: “When we have another financial crisis, our tools are limited.”

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Such concerns are reinforced by claims that eurozone banks might be much more vulnerable to a repeat of the 2008 financial crisis than EU 'stress-tests' have previously said.

This is according to an audit by the European Court of Auditors (ECA) in Luxembourg which says that stress tests, published last year, excluded many of Europe's weakest banks, ignored key factors that could cause a bank to fail, and used simulations which had nothing to do with the 2008 crisis.

German bank DB already did badly in the EBA's last test, but the negative audit suggests that its problems could be even worse than previously thought. The 2018 stress test included just 48 banks, down from 90 in its first survey in 2011, because it changed the criteria so that its "actual threshold" covered banks which held €100bn or more in consolidated assets "to the exclusion of some countries with weaker banking systems”.

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On top of the perils of a new downturn, the continent has also been recently rocked by multiple banking scandals, all with international implications. Experts say this shows that more oversight of the banking sector is still needed, citing, as a prime example, the case involving Bankhaus Erbe’s “sham” acquisition by Czech bank J&T. J&T Banka is a financial conglomerate from Eastern Europe, which is registered in Slovakia, but also operates in the Czech Republic (where its headquarters is located) and many other countries.

Valentina Romanova, president and former owner of Bankhaus Erbe, has been accused of perpetrating a double sale of Bankhaus Erbe after selling a 59% stake in the bank to businessman Pavel Komissarov for a sum of $13.7 million, only to turn around and sell 100% of its shares to J&T.

Romanova, the daughter of a former member of the Politburo of the Central Committee of the Communist Party under the Soviet Union, stands accused of taking Komissarov’s payment but refusing to issue the necessary documents to validate the sale. According to Komissarov, Romanova also ignored his alternative proposition of returning the funds and voiding the sale. Komissarov is now suing Romanova in Russian courts, holding that he was defrauded of his $13.7 million investment.

Romanova, for her part, has responded to press inquiries about the case by outlets such as Russia’s Novaya Gazeta with threats of legal action, brusquely informing the paper that her husband is “a former deputy attorney general and head of the Investigative Department of the Prosecutor General’s Office” in an apparent bid to threaten the journalists into backing off the story. Instead, they published her message in full.

This scandal is not the only recent setback to the banking sector’s already badly tarnished reputation. For example, Jesper Nielsen, a top executive at Danske Bank, was fired recently in a scandal involving overcharging customers. He was the longest serving of the 10 people at the top of Denmark’s biggest bank which is struggling to restore trust after a $230bn money-laundering scandal exploded at its Estonian unit.

Elsewhere, the Moldovan parliamentary commission has just published the second part of an investigation detailing the disappearance of some $1bn from the nation’s banking system, an event that the tiny, impoverished country is still reeling from. Aleksandr Slusari, the parliament's deputy speaker and chairman of the body’s investigative committee, has demanded to know who was responsible for the disappearance of the funds, blaming the prosecutor's office for hiding it.

Rogoff added: ”Unfortunately, when there is a financial crisis, a debt crisis, any kind of crisis, the hardest hit are almost invariably the disenfranchised, the poorest people and, very often, the middle class. So, a financial crisis would be bad for the wealthy but it would be worse for ordinary people. So, when we think about protecting the economy from a financial crisis, it's not just about protecting the wealthy financiers; it's about protecting ordinary people.”

All these issues represent a challenge for incoming ECB chief Christine Lagarde. Lagarde, a lawyer, will take over at a time of economic uncertainty with Megan Greene, economist at the Harvard Kennedy School, saying: “Largarde’s lack of direct experience of working in financial markets is also notable and could be relevant if Europe heads into recession.”

Banking

Decline and near fall of Italy's Monte dei Paschi, the world's oldest bank

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View of the logo of Monte dei Paschi di Siena (MPS), the oldest bank in the world, which faces massive layoffs as part of a planned corporate merger, in Siena, Italy, August 11, 2021. Picture taken August 11, 2021. REUTERS / Jennifer Lorenzini

View of the logo of Monte dei Paschi di Siena (MPS), the oldest bank in the world, which faces massive layoffs as part of a planned corporate merger, in Siena, Italy. REUTERS / Jennifer Lorenzini

Four years after spending €5.4 billion ($6.3bn) to rescue it, Rome is in talks to sell Monte dei Paschi (BMPS.MI) to UniCredit (CRDI.MI) and cut its 64% stake in the Tuscan bank, writes Valentina Za, Reuters.

Here is a timeline of key events in the recent history of Monte dei Paschi (MPS), which have made it the epitome of Italy's banking nightmare.

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NOVEMBER 2007 - MPS buys Antonveneta from Santander (SAN.MC) for €9bn in cash, just months after the Spanish bank paid €6.6bn for the Italian regional lender.

JANUARY 2008 - MPS announces a €5bn rights issue, a €1bn convertible financial instrument called Fresh 2008, €2bn in subordinated, hybrid capital bonds and a €1.95bn bridge loan to fund the Antonveneta deal.

MARCH 2008 - The Bank of Italy, led by Mario Draghi, approves the Antonveneta takeover subject to MPS rebuilding its capital.

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MARCH 2009 - MPS sells €1.9bn in special bonds to Italy's Treasury to shore up its finances.

JULY 2011 - MPS raises €2.15bn in a rights issue ahead of European stress test results.

SEPTEMBER 2011 - The Bank of Italy provides €6bn in emergency liquidity to MPS through repo deals as the euro zone sovereign debt crisis escalates.

DECEMBER 2011 - The European Banking Authority sets MPS' capital shortfall at 3.267 billion euros as part of a general recommendation to 71 lenders to boost their capital reserves.

FEBRUARY 2012 - MPS cuts its capital needs by €1bn by converting hybrid capital instruments into shares.

MARCH 2012 - MPS posts a €4.7bn 2011 loss after billions of goodwill writedowns on deals including Antonveneta.

MAY 2012 - Italian police search MPS headquarters as prosecutors investigate whether it misled regulators over the Antonveneta acquisition.

JUNE 2012 - MPS says it needs €1.3bn in capital to comply with EBA's recommendation.

JUNE 2012 - MPS asks Italy's Treasury to underwrite up to another €2bn in special bonds.

OCTOBER 2012 - Shareholders approve a €1bn share issue aimed at new investors.

FEBRUARY 2013 - MPS says losses stemming from three 2006-09 derivatives trades amount to €730m.

MARCH 2013 - MPS loses €3.17bn in 2012, hit by plunging prices on its large Italian government bond holdings.

MARCH 2014 - MPS posts 2013 net loss of €1.44bn.

JUNE 2014 - MPS raises €5bn in a deeply discounted rights issue and repays the state €3.1bn.

OCTOBER 2014 - MPS emerges as the worst performer in Europe-wide stress tests with a capital shortfall of €2.1bn.

OCTOBER 2014 - The former MPS chairman, chief executive and finance chief are sentenced to three-and-a-half years in jail after being found guilty of misleading regulators.

NOVEMBER 2014 - MPS plans to raise up to €2.5bn after stress tests results.

JUNE 2015 - MPS raises €3bn in cash having upped the size of its rights issue after posting a €5.3bn net loss for 2014 on record bad loan writedowns. It repays the remaining €1.1bn state underwritten special bond.

JULY 2016 - MPS announces a new €5bn rights issue and plans to offload €28bn euros in bad loans as European bank stress tests show it would have negative equity in a slump.

DECEMBER 2016 - MPS turns to the state for help under a precautionary recapitalisation scheme after its cash call fails. The ECB sets the bank's capital needs at €8.8bn.

JULY 2017 - After the ECB declares MPS solvent, the EU Commission clears the bailout at a cost of €5.4bn for the state in return for a 68% stake. Private investors contribute €2.8bn for a total of €8.2bn.

FEBRUARY 2018 - MPS swings to profit in 2018 but says its updated projections are below EU agreed restructuring targets.

OCTOBER 2018 - MPS completes Europe's biggest bad loan securitisation deal, shedding 24 billion euros in bad debts.

FEBRUARY 2020 - MPS posts €1bn 2019 loss.

MAY 2020 - CEO Marco Morelli steps down urging Rome to secure a partner for MPS as soon as possible. He is replaced by 5-Star backed Guido Bastianini.

AUGUST 2020 - Italy sets aside €1.5bn to help MPS as it works to meet a mid-2022 re-privatization deadline.

OCTOBER 2020 - MPS shareholders approve a state-sponsored plan to cut soured loans to 4.3% of total lending. Italy's stake falls to 64% as a decree paves the way for its sale.

OCTOBER 2020 - A Milan court convicts MPS' former CEO and chairman for false accounting in a surprise decision that forces MPS to boost legal risk provisions.

DECEMBER 2020 - MPS says it needs up to €2.5bn in capital.

DECEMBER 2020 - Italy approves tax incentives for bank mergers entailing a €2.3bn benefit for an MPS buyer.

JANUARY 2021 - MPS says to open its books to potential partners.

FEBRUARY 2021 - MPS posts €1.69bn loss for 2020.

APRIL 2021 - Andrea Orcel takes over as UniCredit CEO.

JULY 2021 - UniCredit enters exclusive talks with Italy's Treasury to buy "selected parts" of MPS, a day before European banking stress test results show the smaller bank's capital would be wiped out in a slump.

($1 = €0.8527)

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Banking

The crypto currency bull run isn’t just about Bitcoin

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It’s been a wild and unpredictable year in so many ways. Crypto currencies boomed with institutional investors flooding in. Bitcoin hit a new all-time high in December. Institutional investment in bitcoin was the headline news of 2020. Companies both big and small moved huge percentages of their cash reserves into bitcoin, including the likes of MicroStrategy, Mass Mutual, and Square. And if recent announcements are anything to go by, they’re only just getting started, writes Colin Stevens.

However, as exciting as it’s been to watch them pour into the space over the last year, the numbers are still relatively low. In 2021, the success, or not, of their decisions will become clear. This could motivate a whole new wave of institutional investors to follow their lead. MicroStrategy’s $425 million investment in bitcoin, for example, has already more than doubled in value (as of 18 December 2020). These are numbers that will interest any business or investor.

Furthermore, cryptocurrency and investment platforms such as Luno are already making it even easier for institutions to get involved. The recent news that the S&P Dow Jones Indices — a joint venture between S&P Global, the CME Group and News Corp — will debut cryptocurrency indexes in 2021, for example, should put crypto in front of even more investors on a daily basis.

The next big news for crypto currency will be sovereign wealth funds and governments. Will they be ready to make a public investment into crypto next year?

It’s actually technically already happened, albeit not directly. The Norwegian Government Pension Fund, also known as the Oil Fund, now owns almost 600 Bitcoin (BTC) indirectly through its 1.51% stake in MicroStrategy.

An open and public investment by such an entity would be a show of trust that could set off a frenzy of government activity. If institutional investment brought mainstream respectability to Bitcoin and other cryptocurrencies, imagine what the backing of a sovereign wealth fund or government would do?

The recent bull run has certainly started people talking, but compare the media attention in 2017 to this time around. It’s been limited, to say the least

One reason is that this bull run has been driven primarily by institutional investors. This has often meant crypto news landing on the lesser-spotted business pages. The mainstream media’s attention has also, understandably, been elsewhere – pandemics and contentious presidential elections have a tendency to dominate the news cycle.

But there are signs this is changing. December’s new historical all-time high has brought with it a significant amount of positive coverage across major publications, including The New York Times, The Daily Telegraph, and The Independent.

If the bitcoin price continues to rise - as many suspect it will - this may drive another wave of headlines and again cement cryptocurrency firmly on the front pages. This puts cryptocurrency firmly back in the public consciousness, potentially lighting a fire under consumer demand.

There are a number of reasons why this could be, but chief among them is that this bull run has been driven fundamentally by institutional demand rather than retail.

An increase in media attention would certainly change this, but perhaps even more important is that it’s now easier than ever to buy crypto currency, with the success of Luno and Coinbase, supporting customers around the world, but also the likes of PayPal and Square are seeing huge success in the US. They’re currently buying the equivalent of 100% of newly minted bitcoin just to cover the demand they’re getting from US customers.

There is another element. This latest bull run for the crypto ecosystem as a whole is proving that there is an appetite for tokens that do more than just act as a store of value (i.e., bitcoins) and now tokens with more specific and sophisticated use cases are becoming more popular.

Cryptocurrency tokens are fungible digital assets that can be used as mediums of exchange (traded) inside of the issuing blockchain project’s ecosystem. They are best described by how they serve the end user. Think of tokens as the foods that nourish blockchain-based ecosystems.

Crypto tokens, which are also called crypto assets, are special kinds of virtual currency tokens that reside on their own blockchains and represent an asset or utility. Most often, they are used to fundraise for crowd sales, but they can also be used as a substitute for other things.

On crypto token which has gained significant news coverage is the Silk Road Coin. A digital crypto token issued by LGR Global .

The Silk Road Coin is a special-purpose token, designed for application within the global commodity trading industry. According to LGR Global’s founder and CEO, Ali Amirliravi, “there are many pain-points within the commodity trading business, including delays in fund transfers and settlements. Transparency issues and currency fluctuations work to further undermine the efficiency and speed of commodity trading transactions. Building on our vast industry knowledge, we have created the Silk Road Coin to address these issues and comprehensively optimize the commodity trading and trade finance industries.”

LGR Global’s founder and CEO, Ali Amirliravi

LGR Global’s founder and CEO, Ali Amirliravi

To begin, LGR Global is focused on optimizing cross-border money movement and will then expand to digitizing end-to-end trade finance using emerging technologies like Blockchain, Smart Contracts, A.I. and Big Data Analytics. “The LGR platform was launched in the Silk Road Area (Europe-Central Asia-China)”, explains Amirliravi, “an area which represents 60% of the global population, 33% of the world’s GDP, and posts incredibly high & consistent rates of economic growth (+6% p.a.).”

The LGR Global platform aims to safely and successfully complete money transfers as quickly as possible. It achieves this by removing the middlemen and transferring the money directly from sender to receiver. The Silk Road Coin fits into the LGR ecosystem as the exclusive mechanism for fee payments incurred by traders and producers who use the LGR platform to conduct large and complex cross-border money movement transactions and trade finance operations.

When asked what 2021 will look like for LGR Global and the Silk Road Coin, Amirliravi stated, “we are incredibly optimistic for the new year; industry and investor feedback for the SRC and digital trade finance platform has been overwhelmingly positive. We know we can make a big difference in the commodity trading industry by digitizing and optimizing processes, and we are excited to showcase successful pilot projects beginning in Q1 & Q2 of 2021.”

Industry-specific tokens and blockchain platforms have garnered significant interest from institutional investors – it’s clear there is an appetite for forward-thinking solutions that solve concrete issues.

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McGuinness presents strategy to deal with Non-Performing Loans

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The European Commission has today (16 December) presented a strategy to prevent a future build-up of nonperforming loans (NPLs) across the European Union, as a result of the coronavirus crisis. The strategy aims to ensure that EU households and businesses continue to have access to the funding they need throughout the crisis. Banks have a crucial role to play in mitigating the effects of the coronavirus crisis, by maintaining the financing of the economy. This is key in order to support the EU's economic recovery. Given the impact coronavirus has had on the EU's economy, the volume of NPLs is expected to rise across the EU, although the timing and magnitude of this increase is still uncertain.

Depending on how quickly the EU's economy recovers from the coronavirus crisis, banks' asset quality – and in turn, their lending capacity – could deteriorate. An Economy that Works for People Executive Vice President Valdis Dombrovskis said: “History shows us that it is best to tackle non-performing loans early and decisively, especially if we want banks to continue supporting businesses and households. We are taking preventive and coordinated action now. Today's strategy will help contribute to Europe's swift and sustainable recovery by helping banks to offload these loans from their balance sheets and keep credit flowing.”

Mairead McGuinness, the commissioner responsible for financial services, financial stability and the Capital Markets Union, said: “Many firms and households have come under significant financial pressure due to the pandemic. Making sure that European citizens and businesses continue to receive support from their banks is a top priority for the Commission. Today we put forward a set of measures that, while ensuring borrower protection, can help prevent a rise in NPLs similar to the one after the last financial crisis.”

In order to give member states and the financial sector the necessary tools to address a rise of NPLs in the EU's banking sector early on, the Commission is proposing a series of actions with four main goals:

1. Further developing secondary markets for distressed assets: This will allow banks to move NPLs off their balance sheets, while ensuring further strengthened protection for debtors. A key step in this process would be the adoption of the Commission's proposal on credit servicers and credit purchasers which is currently being discussed by the European Parliament and the Council. These rules would reinforce debtor protection on secondary markets. The Commission sees merit in the establishment of a central electronic data hub at EU level in order to enhance market transparency. Such a hub would act as a data repository underpinning the NPL market in order to allow a better exchange of information between all actors involved (credit sellers, credit purchasers, credit servicers, asset management companies (AMCs) and private NPL platforms) so that NPLs are dealt with in an effective manner. On the basis of a public consultation, the Commission would explore several alternatives for establishing a data hub at European level and determine the best way forward. One of the options could be to establish the data hub by extending the remit of the existing European DataWarehouse (ED).

2. Reform the EU's corporate insolvency and debt recovery legislation: This will help converge the various insolvency frameworks across the EU, while maintaining high standards of consumer protection. More convergent insolvency procedures would increase legal certainty and speed up the recovery of value for the benefit of both creditor and the debtor. The Commission urges the Parliament and Council to reach an agreement swiftly on the legislative proposal for minimum harmonisation rules on accelerated extrajudicial collateral enforcement, which the Commission proposed in 2018.

3. Support the establishment and cooperation of national asset management companies (AMCs) at EU level: Asset management companies are vehicles that provide relief to banks that are struggling by enabling them to remove NPLs from their balance sheets. This helps banks refocus on lending to viable firms and households instead of managing NPLs. The Commission stands ready to support member states in setting up national AMCs – if they wish to do so – and would explore how co-operation could be fostered by establishing an EU network of national AMCs. While national AMCs are valuable because they benefit from domestic expertise, an EU network of national AMCs could enable national entities to exchange best practices, enforce data and transparency standards and better co-ordinate actions. The network of AMCs could furthermore use the data hub to co-ordinate and co-operate with each other in order to share information on investors, debtors and servicers. Accessing information on NPL markets will require that all relevant data protection rules regarding debtors are respected.

4. Precautionary measures: While the EU's banking sector is overall in a much sounder position than after the financial crisis, member states continue to have varying economic policy responses. Given the special circumstances of the current health crisis, authorities have the possibility to implement precautionary public support measures, where needed, to ensure the continued funding of the real economy under the EU's Bank Recovery and Resolution Directive and State aid frameworks Background The Commission's NPL strategy proposed today builds upon a consistent set of previously implemented measures.

In July 2017, finance ministers in the ECOFIN agreed on a first Action Plan to tackle NPLs. In line with the ECOFIN Action Plan, the Commission announced in its Communication on completing the Banking Union of October 2017 a comprehensive package of measures to reduce the level of NPLs in the EU. In March 2018, the Commission presented its package of measures to tackle high NPL ratios. The proposed measures included the NPL backstop, which required banks to build minimum loss coverage levels for newly originated loans, a proposal for a Directive on credit servicers, credit purchasers and for the recovery of collateral and the blueprint for the set-up of national asset management companies.

To mitigate the impact of the coronavirus crisis, the Commission's Banking Package from April 2020 has implemented targeted “quick fix” amendments to the EU's banking prudential rules. In addition, the Capital Markets Recovery Package, adopted in July 2020, proposed targeted changes to capital market rules to encourage greater investments in the economy, allow for the rapid re-capitalisation of companies and increase banks' capacity to finance the recovery. The Recovery and Resilience Facility (RRF) will also provide substantial support to reforms aimed at improving insolvency, judicial and administrative frameworks and underpinning efficient NPL resolution.

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