Rebel Traders – Analysis Without The Hype

This last bank closes the round of five failed banks this week. It will be however noted that these are mostly “small” or regional banks and that they have been bought up by competitors, which gives a real illustration of the economic function of a recession: weeding out the unnecessary or unprofitable companies or individuals. In general, it is precisely the reason for which recessions are often followed by longer periods of economic growth.

While the number of 100 failed banks may seem a bit striking, it should not be forgotten that in the end, banks are businesses like any other. They also fail. Hence, the use of a guarantee mechanism like the FDIC. The issue could be when (and more importantly, “if”) the failed banks’ losses go beyond the financing capabilities of the FDIC.

FOR IMMEDIATE RELEASE
October 23, 2009

Riverview Community Bank, Otsego, Minnesota, was closed today by the Minnesota Department of Commerce, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Central Bank, Stillwater, Minnesota, to assume all of the deposits of Riverview Community Bank.

The two branches of Riverview Community Bank will reopen on Saturday as branches of Central Bank. Depositors of Riverview Community Bank will automatically become depositors of Central Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branches until Central Bank can fully integrate the deposit records of Riverview Community Bank.

This evening and over the weekend, depositors of Riverview Community Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of August 31, 2009, Riverview Community Bank had total assets of $108 million and total deposits of approximately $80 million. Central Bank did not pay the FDIC a premium to assume all of the deposits of Riverview Community Bank. In addition to assuming all of the deposits of the failed bank, Central Bank agreed to purchase essentially all of the assets.

The FDIC and Central Bank entered into a loss-share transaction on approximately $75 million of Riverview Community Bank’s assets. Central Bank will share in the losses on the assets covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers. For more information on loss share, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-355-0814. The phone number will be operational this evening until 9:00 p.m., Central Daylight Time (CDT); on Saturday from 9:00 a.m. to 6:00 p.m., CDT; on Sunday from noon to 6:00 p.m., CDT; and thereafter from 8:00 a.m. to 8:00 p.m., CDT. Interested parties can also visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/riverview-mn.html.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $20 million. Central Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Riverview Community Bank is the 105th FDIC-insured institution to fail in the Nation this year, and the fifth in Minnesota. The last FDIC-insured institution closed in the state was Jennings State Bank, Spring Grove, on October 2, 2009.

FOR IMMEDIATE RELEASE
October 23, 2009

Bank of Elmwood, Racine, Wisconsin, was closed today by the Wisconsin Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Tri City National Bank, Oak Creek, Wisconsin, to assume all of the deposits of Bank of Elmwood.

The five branches of Bank of Elmwood will reopen on Saturday as branches of Tri City National Bank. Depositors of Bank of Elmwood will automatically become depositors of Tri City National Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until Tri City National Bank can fully integrate the deposit records of Bank of Elmwood.

This evening and over the weekend, depositors of Bank of Elmwood can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of September 30, 2009, Bank of Elmwood had total assets of $327.4 million and total deposits of approximately $273.2 million. Tri City National Bank did not pay the FDIC a premium for the deposits of Bank of Elmwood. In addition to assuming all of the deposits of the failed bank, Tri City National Bank agreed to purchase essentially all of the assets.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-234-9027. The phone number will be operational this evening until 9:00 p.m., Central Daylight Time (CDT); on Saturday from 9:00 a.m. to 6:00 p.m., CDT; on Sunday from noon to 6:00 p.m., CDT; and thereafter from 8:00 a.m. to 8:00 p.m., CDT. Interested parties also can visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/elmwood.html.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $101.1 million. Tri City National Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Bank of Elmwood is the 104th FDIC-insured institution to fail in the Nation this year, and the first in Wisconsin. The last FDIC-insured institution closed in the state was The First National Bank of Blanchardville, Blanchardville, on May 9, 2003.

FOR IMMEDIATE RELEASE
October 23, 2009

Hillcrest Bank Florida, Naples, Florida, was closed today by the Florida Office of Financial Regulation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Stonegate Bank, Fort Lauderdale, Florida, to assume all of the deposits of Hillcrest Bank Florida.

The six branches of Hillcrest Bank Florida will reopen on Monday as branches of Stonegate Bank. Depositors of Hillcrest Bank Florida will automatically become depositors of Stonegate Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branches until Stonegate Bank can fully integrate the deposit records of Hillcrest Bank Florida.

This evening and over the weekend, depositors of Hillcrest Bank Florida can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of October 1, 2009 , Hillcrest Bank Florida had total assets of $83 million and total deposits of approximately $84 million. Stonegate Bank will pay the FDIC a premium of 0.50 percent to assume all of the deposits of Hillcrest Bank Florida. In addition to assuming all of the deposits of the failed bank, Stonegate Bank agreed to purchase $28 million of the failed bank’s assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-517-1846. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties can also visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/hillcrest-fl.html.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $45 million. Stonegate Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Hillcrest Bank Florida is the 102nd FDIC-insured institution to fail in the Nation this year, and the eighth in Florida. The last FDIC-insured institution closed in the state was Partners Bank, Naples, earlier this evening.

FOR IMMEDIATE RELEASE
October 23, 2009

American United Bank, Lawrenceville, Georgia, was closed today by the Georgia Department of Banking & Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Ameris Bank, Moultrie, Georgia, to assume all of the deposits of American United Bank.

The sole branch of American United Bank will reopen on Monday as a branch of Ameris Bank. Depositors of American United Bank will automatically become depositors of Ameris Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from Ameris Bank that it has completed systems changes to allow other Ameris Bank branches to process their accounts as well.

This evening and over the weekend, depositors of American United Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of August 11, 2009, American United Bank had total assets of $111 million and total deposits of approximately $101 million. Ameris Bank will pay the FDIC a premium of 1.02 percent to assume all of the deposits of American United Bank. In addition to assuming all of the deposits of the failed bank, Ameris Bank agreed to purchase essentially all of the assets.

The FDIC and Ameris Bank entered into a loss-share transaction on approximately $92 million of American United Bank’s assets. Ameris Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers. For more information on loss share, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-913-3058. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties also can visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/americanunited.html.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $44 million. Ameris Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. American United Bank is the 101st FDIC-insured institution to fail in the Nation this year, and the twentieth in Georgia. The last FDIC-insured institution closed in the state was Georgian Bank, Atlanta, on September 25, 2009.

It was merely a question of time, but then a tiny bank of Florida got the unenviable title of being the 100th bank to fail in 2009. Four other banks also went under Friday.

FOR IMMEDIATE RELEASE
October 23, 2009

Partners Bank, Naples, Florida, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Stonegate Bank, Fort Lauderdale, Florida, to assume all of the deposits of Partners Bank.

The two branches of Partners Bank will reopen on Monday as branches of Stonegate Bank. Depositors of Partners Bank will automatically become depositors of Stonegate Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from Stonegate Bank that it has completed systems changes to allow other Stonegate Bank branches to process their accounts as well.

This evening and over the weekend, depositors of Partners Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of September 30, 2009, Partners Bank had total assets of $65.5 million and total deposits of approximately $64.9 million. Stonegate Bank did not pay the FDIC a premium for the deposits of Partners Bank. In addition to assuming all of the deposits of the failed bank, Stonegate Bank agreed to purchase essentially all of the assets.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-357-7599. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties also can visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/partners-fl.html.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $28.6 million. Stonegate Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Partners Bank is the 100th FDIC-insured institution to fail in the Nation this year, and the seventh in Florida. The last FDIC-insured institution closed in the state was Community National Bank of Sarasota County, Venice, on August 7, 2009.

Last July, Meredith Whitney, whom many had come to consider as a “bear angel” ever since she recognized first that Citigroup would cut its dividend in 2007, had trumpeted the doom of the last pack of bears that were resisting to the bullish onslaught. She had then made GS her only “buy” based on some light considerations on the money booked by selling corporate and government debt.

Will she be today the “Angel of Apocalypse” for the bullish crowds? She actually downgraded GS from “buy” to “neutral”, just as other analysts were making (a tad bit lately) GS their “buy”. The sanction was immediate: GS slided 3 $ lower.

I had heavily put Meredith under fire for her July “buy”, and I can again reaffirm that such switches in ratings have little to do with “real” analysis. If Meredith Whitney is basing herself on fundamentals, the situation has hardly changed between July and October. If anything, the economy has gotten better looking at the stats. However, losses in CRE are continuing to be an issue for most (if not all) banks and hence the analysts’ expectations that the profit would “triple” seem a bit unrealistic (unless of course, trading has been more profitable than usual). But these elements were already visible back in July to any analyst.

I talked then of “fallen angels”, but today, Meredith would excell as a partner of the “devil” GS in her uncanny ability to pull off such reversals.

Goldman Sachs Group Inc., the biggest U.S. securities firm before converting to a bank last year, was cut to “neutral” by Meredith Whitney, as the analyst dropped her only “buy” recommendation.

Whitney, who correctly predicted in 2007 that Citigroup Inc. would cut its dividend, didn’t update her price estimate on the shares in a summary note distributed to investors today. Further details on the downgrade weren’t immediately available.

The New York-based analyst upgraded Goldman Sachs to “buy” on July 13, since when the stock has risen 34 percent, compared with a 29 percent increase for the Standard & Poor’s 500 Investment Banking & Brokerage Index. The founder of Meredith Whitney Advisory Group LLC said on Sept. 10 that Goldman Sachs “still has a lot of gas in its tank.”

Goldman Sachs shares dropped 0.9 percent to $188.46 in German trading as of 10 a.m. in Frankfurt.

Goldman Sachs, which is due to report third-quarter results on Oct. 15, may say it earned $4.46 a share in the period, according to the report. The New York-based bank posted record earnings in the second quarter.

Goldman Sachs’s profit probably almost tripled to $2.3 billion, according to the average estimate of analysts surveyed by Bloomberg. Revenue from trading has surged to a record as competitors including Morgan Stanley scaled back their riskiest bets.

Goldman Sachs has climbed 125 percent this year on the New York Stock Exchange, the largest increase among the biggest U.S. banks. The bank repaid $10 billion to the U.S. Treasury in June.

Goldman Sachs on Oct. 7 was rated “buy” in new coverage at Deutsche Bank AG, which said the firm may boost market share in investment banking and trading. A day earlier, the bank was upgraded to “outperform” from “underperform” by CLSA analyst Mike Mayo, who also said it may be a “long-term market-share winner.”

Bearish commentators have been insisting heavily on the lack of resumption in consumer spending to justify doubts on a US recovery, or even the possibility of a double-dip recession by 2010 (other commentators have ascribed a possible double-dip to hyper-inflation, so you can make your choice in the matters of bearish scenarios).

However, an important factor that might be missed is the increase in US savings. In a recent interview,  Jim McCaughan, a representative of Principal Global Investors, pointed out some elements to give a more nuanced image of the US economic situation.

Whereas he believes that a number of smaller banks shall not be able to survive the losses on RE loans, he points out that the larger banks have been adequately immunized by their capital raise. While a lot of reservation can be expressed as to his assessment that US large banks are “transparent”, it remains that the logic of “too big to fail” holds true.

However, McCaughan also points out that the short-term perspectives might be bleak for the economy, considering that the high savings rate also means less consumer spending. But and that’s a point worth noticing, he also points out what I’ve been considering as a “paradigm change”. The high rate of savings is a negative aspect if you take a keynesian perspective; in a monetary perspective, a high rate of savings means more money available for investment.

The danger in considering only the negative side of the hike in savings is of missing the formidable paradigm change and the chance for the US economy if no other issue adds up on to the current predicament.

The reduction in spending means of course a reorganization of the economy and an evolution of the various sectors in order to adapt to more frugal consumers and to use to the best the cash made available by the savings. For one thing, this cash could help to absorb a part of the US debt nationally, and it might be invested into the development of new technologies or sciences. On the whole, once the necessary adjustments done, the economy could emerge stronger, with a strong investment arm (provided that the banking culture is reordered towards longer-term objectives rather than high short-term returns), and provided the necessary steps are taken, with a new industrial sector.

However, precisely because the recession has been accompanied by enormous productivity gains, it should not be expected that personnel is going to be hired in droves any time soon. These same productivity gains and cost-cutting could give some additional surprises in the upcoming earnings season, despite the more or less tepid recovery seen so far.

But the mix of high productivity, the high level of savings and the painful social differences between the “have” and the “have-nots” will make it imperative for the US to develop a social policy at the government level to handle a social rift that might become only more pronounced.

The U.S. economy’s recovery from its worst recession since the 1930s will be helped as savings climb to the highest level in 24 years, according to Jim McCaughan, the chief executive officer of Principal Global Investors.

Americans will keep up to 9 percent of their disposable income in the bank, the most since 1985, said McCaughan, who oversees $201 billion, in an Oct. 2 interview. While less spending will cut U.S. growth and profits at retailers, it will make the expansion last longer by reducing household debt and the nation’s trade deficit, he said.

“You’re going to see a pretty tepid recovery,” McCaughan said in New York. “You’ll have a less leveraged personal sector and financial sector. You’ll get growth. It won’t be 5 percent, it will be 2 percent. That isn’t so bad.”

The outlook echoes predictions from Richard Clarida of Newport Beach, California-based Pacific Investment Management Co. and Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey. Clarida, whose firm runs the world’s largest bond fund, estimated the savings rate may exceed 8 percent. Shilling said Americans are on a decade-long “savings spree” that will restrain the economy. Both spoke in Bloomberg Radio interviews last month.

Consumers lost $9.67 trillion of wealth last year as the housing bubble burst and the Standard & Poor’s 500 Index fell 38 percent, the most since 1937. The declines spurred them to push savings up to 5.9 percent in May, the highest since 1998. The rate slid to 3 percent in August, above the three-year low of 0.8 percent in April 2008, Commerce Department data show.

Belt Tightening

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” according to a Bloomberg News poll from Sept. 17. More than three in four adults said they reduced spending in the past year, the survey showed.

(…)

“You need a more balanced economy,” McCaughan said. “Consumer spending got to 70 percent of the U.S. economy. That’s actually unsustainable.”

The median economist surveyed last month by Bloomberg forecast U.S. growth of 2.4 percent next year and 2.9 percent in 2011. That compares with the gross domestic product expansion that exceeded 3 percent in 2004 and 2005 as consumers used cash extracted from their real-estate holdings to fuel spending.

More Failures

McCaughan predicted more failures at smaller banks as they struggle with mounting losses on real-estate loans. Larger lenders have been strengthened by government cash infusions, he added. Almost 100 U.S. banks have collapsed this year, the most since the savings-and-loans crisis of the early 1990s.

“There will be more land mines” in regional lenders, McCaughan said. “The large U.S. banks have been very good at being transparent. They’ve raised a lot of capital, so I think they’re in fundamentally quite a strong position.” (…)

The US treasury should announce on Monday that three more funds have been retained to buy US “toxic assets”. The purchase operations should thus start as soon as the selected funds (a total of nine, among which well-known names such as Blackrock) manage to raise 500 million USD in capital. Once all the funds have their capital, the buying force of the program will be of about 12 Bn USD, which will help recapitalize “sick” banks (and directly provide an additional government-backed funding in cash to these banks).

The U.S. Treasury Department will announce on Monday that three more funds have met requirements to get government financing that will let them begin purchases of banks’ so-called toxic assets.Treasury said last Wednesday, which was September 30, that Invesco Ltd and Trust Company of the West, or TCW, were the first of nine public-private investment funds to raise the necessary capital to launch the program for buying toxic assets.

Three more — AllianceBernstein LP and its sub-advisors Greenfield Partners LLC and Rialto Capital Management LLC; BlackRock Inc and Wellington Capital Management — each will be named on Monday as also having raised enough capital to participate in the program.

The Public-Private Investment Program, known as the PPIP, has been scaled back as banks have shown they can raise capital in the private sector without first unloading troubled assets, many of which are tied to bad mortgages.

When the plan was announced in March, Treasury hoped the funds could take up to $1 trillion of toxic assets from banks’ balance sheets. But that target is now around $40 billion, made up of private and public investment plus debt financing.

Treasury provides debt financing for up to 100 percent of the total capital commitments of funds in the program, representing about $12.25 billion of total debt and equity commitments from the first five funds now participating in the program.

Treasury initially approved nine funds to participate in the PPIP; it expects the remaining four of them to complete closings by the end of October. It said then that funds would have until October 8, which is this Thursday, to raise their required initial capital amounts.

Treasury now says timing of the closures depends partly on how funds raise the required $500 million of capital they need in order to get matching government funds, with some taking longer to complete public offerings targeted to public investors.

What do you do if you are in financial trouble, one thing you do is call all your friends who owe you money and ask them to pay up.

If you are the Federal Deposit Insurance Corporation (FDIC) then you ask all of the banks that they protect and ask them to pay their contributions to the insurance fund as soon as possible.

The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion. The FDIC Board also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. [...]

A proposed rule change that is now on the table for consideration that would require all banks to prepay their contributions to the deposit insurance fund. It is known to all people who take the time to look at the facts that the FDIC is essentially broke after having to reimburse depositors as the number of failed banks keeps rising.

Earlier this year the FDIC arranged an aggrement with the U.S. Tresuary (tax payers) for a $500 Billion loan should the FDIC find itself on its knees and desperate for cash. If the FDIC suddenly finds itself in a position where it can’t pay depositers at failed banks, or even if they have to delay reimbursement then the potential for nationwide bank runs will increase significantly.

President Obama has made a new promise that ‘bailouts’ are a thing of the past. So Shelia Bair at the FDIC has likely been persuaded to find other means of raising the needed funds elsewhere first, and if that does not work then they will have to tap the tax payers (which I still see as inevitable).

The FDIC insurance fund is running on fumes. They can go get $500 Billion almost immediately from the Treasury but the cost to the system as a whole will be great. I expect the banks to resist the proposed rule changes.

A new battle in this never ending financial disaster begins.

Part of the astounding growth in the Chinese stock market has been fueled by an unbound lending by the Chinese banks. In addition, the government stimulus also took the form of loans, which in some case were not required at all, but have been made nonetheless.

Now this unrestricted lending is giving some sleepless nights to the Chinese regulators. The lack of risk management and of controls on the lending brought the Chinese regulators to restrict the rules: Chinese banks will not be allowed to integrate to their capital subordinated bonds issued by other banks (in short: no way for the banks to securitize their loans and sell the problems to other banks), over the next year. The question now is if these changes won’t happen too late as the bad loans have been rising. However, lending has slowed down since the beginning of H2.

Worried that the rapid credit growth this year might aggravate risks for the banking sector, China’s top banking watchdog on Friday reiterated that domestic lenders should enhance their risk management capacity and adhere to regulatory requirements.

“With bank loans growing rapidly, all kinds of risks are rising in the banking industry,” Liu Mingkang, chairman of China Banking Regulatory Commission, said in the statement posted on the regulator’s website.

Chinese banks advanced 8.15 trillion yuan ($1.19 trillion) in new loans in the first eight months, far higher than the 4.91 trillion yuan ($719 billion) it extended during the same period last year, sparking wide concerns of rising default risks at banks and asset bubbles in the capital market.

Liu said the ongoing global financial crisis has triggered a worldwide reflection on overhauling the financial supervision system, which includes revising and improving rules on capital adequacy, provision, leverage ratio, liquidity, as well as corporate governance and compensation system.

Chinese banking industry should strengthen their compliance management and get prepared to follow up the upcoming changes among the global financial institutions, the statement said citing the chairman’s remarks at an annual banking conference on compliance management in Shanghai.

In face of the explosive lending growth this year, CBRC has been urging banks to stick to the regulatory requirement for capital adequacy and be vigilant on signs of rising bad loans.

Earlier this month the regulator announced plans to implement stricter capital requirements for lenders, forcing them to deduct holdings of subordinated bonds issued by other banks from their supplementary capital over the next few years.

Many Chinese banks have promised to slow down lending in the second half. With new loans reaching 410.4 billion yuan in August, the flood of lending has been eased so far, echoing Liu Mingkang’s recent remarks that bank lending would be more stable in the second half.

However, the nation’s top policymakers have pledged to maintain stimulus spending and a “moderately loose” monetary policy as the economy is at a critical phase of recovery. With the effective help of the massive bank lending in the first half, the nation’s economic growth has rebounded to 7.9 percent in the second quarter after dipping to 6.1 percent in the first three months of the year.

As we reported previously, about 20 % of the 7.4 trillion Yuan in stimulus lending during H1 2009 is considered to have gone to inflate the property and stock market bubble.

This was common knowledge, but apparently, despite the repeated assurances of the Chinese government that the money supply would be kept flowing as long as necessary to ensure a recovery of the economy, there are increasing signs that they are trying to deflate the stock bubble.

For starters, the suspicions of the auditors were awoken when they noticed that 23 % of the loans were given under the form of “discounted bills financing”, which is a loan given on receivable notes at a discount to their face value. This immediately available cash is thus theoretically not traceable anymore.

This news might explain some of the brutal pullbacks on the Shanghai these latter times, as the source quoted by Caijing says that “Some capital from unidentified sources fled the stock market as soon as word of the investigation spread”.

However, the companies that played in the stock market with their loans may have some worries ahead: the auditors announced that they wished to trace the larger accounts to find out who abused of these loans.

China’s National Audit Office is investigating recent lending by major commercial banks, in an effort to trace the flow of loans issued in support of the government’s economic stimulus funds, a senior executive at a major bank told Caijing.

The investigation focuses on loans that might have been diverted to stock markets.

In November, China unveiled a 4-trillion-yuan stimulus package to revive an economy badly shaken by the global downturn. The stimulus plan was facilitated by a moderately loose monetary policy, which resulted in the 7.4 trillion yuan record lending in the first half of 2009.

Concerns from regulators were aroused after about 23 percent of total first-half new lending was extended in discounted bills financing.

The authorities now suspect that much of the money was improperly diverted from the real economy to speculative investments in real estate and stocks.

Discounted bills financing is a short-term lending practice allowing companies to raise cash by surrendering receivables at a discount. But once the bills are cashed, banks can no longer monitor the capital flow, providing opportunities for the cash to be invested elsewhere.

“Some capital from unidentified sources fled the stock market as soon as word of the investigation spread,” a senior banker told Caijing.

Unlike loans issued for specific projects, capital from discounted bills is harder to trace. However, people familiar with the NAO investigation said the agency intended to trace large accounts with securities firms and track the funds back to their sources.

“The National Audit Office has the right to extend investigations to enterprises. They can possibly dig things out if they’re determined and make the effort,” said a banker from a large bank, adding that concern over the probe was one reason why capital has quickly fled the stock market.

1 yuan = 14 U.S. cents

An interesting article by an unnamed BOC (Bank Of China) analyst gives some clearer idea as to the amount of funds that were diverted into the stock market and real estate.

A total amount of 1.3 Tn Yuan in loans may have thus diverted into the stock market and the real estate market in China. In total about 7.37 Trillion Yuan were dealt out in loans. This bailout galore generated by the billions of Yuan shelled out by China’s government to help their economy recover seems to have fueled the Shanghai stock market in particular to record heights.

Even more sign that the rally at Shanghai is moving on unstable terrain. However, as the Chinese government announced earlier that it would be continuing its lax monetary position, the current situation could still go on for some time, unless an unforeseen event creates panick in the Chinese markets.

About 16 percent of mid to long-term bank loans, or 1.2 trillion yuan, extended in the first half may have been diverted to capital and real estate investment, a Bank of China analyst told Caijing Aug. 26.

Shi Lei, an analyst with the bank’s financial market department, said the ratio of mid- and long-term loans to fixed assets investment fluctuated between 1.3 and 1.7 percent from 2006 to 2008, but fell 40 percent in the first half to 0.7 to 0.9.

“It’s unlikely the money was deposited in banks to accumulate interest given the high lending rates attached to mid- and long-term loans,” he added.

It was the analyst’s own estimate and not the bank’s official report.

Chinese banks extended a record 7.37 trillion yuan of new loans in the first half as the government pushed a relaxed monetary policy designed to stimulate credit growth and boost consumption.

New loans fell to 355.9 billion yuan in July from 1.53 trillion the previous month after the central bank and regulators introduced a series of measures to rein in lending on concerns of a rise in bad debt and possible inflation, as well as speculation funds may have been misallocated.

The National Audit Office said Aug. 20 it will conduct strict audits of policy banks and some state-owned banks to verify that loans extended in the first half were properly directed to economic stimulus projects.

Strong gains in the benchmark Shanghai Composite Index, which rose 61.5 percent in the first half, coupled with a 10 percent year-on-year rise in property investment to 1.45 trillion yuan, fuelled fears that a large portion of new loans may have been diverted to stock and property speculation.

Revenue generated by property transactions in the first six months rose 53 percent year-on-year to 1.58 trillion yuan, as commercial banks extended 538.1 billion yuan in real estate loans, up 32.6 percent year-on-year, according to the National Bureau of Statistics.

The central bank earlier ruled out quantitative controls on bank lending, and will instead fine-tune monetary policy via open market operations and the issue of central bank bills, amongst other measures.

Premier Wen Jiabao said in an Aug. 24 online statement that China will maintain its proactive fiscal policy and moderately loose monetary policy in order to steer the world’s third-largest economy through the remainder of the global downturn.

1 yuan = 14 U.S. cents Source: Caijing.com