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The Economist Intelligence Unit is relaunching its industry blog. Now known as EIU Views, the site features data-driven commentary by members of the EIU’s industry team. The approach is much the same as Daily Data Point, but the new site will feature a broader pool of editors writing about a wider range of sectors (including, of course, the financial services industry).

Please update your bookmarks and head over to www.eiuviews.com. To see only the finance posts, visit www.eiuviews.com/index.php/category/financial-services. For the finance RSS feed, use www.eiuviews.com/index.php/category/financial-services/feed.

In a day of extraordinary action in the markets, perhaps the most noteworthy move yesterday was a 20% plunge in the share price of Bank of America. Despite rallying today, the bank, America’s largest by assets, has seen its shares lose around 30% of their value so far this month (and nearly 50% so far this year).

Bank of America now trades at a wince-inducing 32% of its book value. This puts it at the bottom of the price-to-book league table for domestic banks. But there are banks in Europe that trade at similar discounts; many of these remain part-nationalised (RBS, Dexia) or face severe sovereign-related stress (UniCredit, Alpha Bank). For Bank of America, a major mortgage lender, this is is not the best neighbourhood to be in.

British banks received a fillip from parliament today, as the Treasury Select Committee called for “more detailed analysis” of the proposal to ring-fence banks’ retail units from the rest of their operations. Banks have criticised the proposal, made by the Independent Commission on Banking, as saddling them with unnecessary costs and restraining their capacity to lend. Signs of a rethink on the proposal sent British banks’ shares sharply higher.

The rally reversed steep declines following Friday’s EU stress test. Although all four of the British banks in the test passed, some of the details that emerged about the banks’ balance sheets spooked investors. In particular, funding costs soared in the test’s “adverse” scenario—which many analysts, including the EIU, think was not nearly adverse enough. The cost of funding for Barclays, for example, rose almost four-fold between 2010 and 2012 in the test, the largest jump in the 90-bank sample. The other British banks in the sample also saw above-average increases in costs, thanks in part to reliance on wholesale funding sources.

Exposure to fickle wholesale markets is one of the reasons cited in favour of erecting firewalls around universal banks’ retail activities. Any new analysis of the retail ring-fence idea should take the implications of banks’ enduring reliance on short-term interbank markets into account.

The Federal Reserve’s “temporary” dollar swap lines with other major central banks are beginning to look like anything but temporary. The facilities were first introduced in December 2007, closed in February 2010, reopened in May 2010, and recently extended through August 2012. Under these agreements, the Fed offers unlimited dollar liquidity to other central banks, which in turn offer the funds to local banks that find it difficult to borrow in interbank markets.

The “re-emergence of strains in short-term US dollar funding markets” was cited by the Fed when it revived the programme last year after its brief hiatus. The recent extension of the swap lines—previously scheduled to expire next month—suggests that officials believe that these strains remain, or may be worsening. But so far the move looks like more of a precaution than a sign of imminent distress. Since announcing the extension on June 29th, no central bank has drawn on the facility (the data is reported weekly, on Thursdays). In fact, the swap lines have not been used since March, when only US$70m was drawn, a small fraction of the hundreds of billions borrowed during the depths of the crisis following the collapse of Lehman Brothers.

After a brief growth spurt, bank lending in the US shrank in April and May, according to the latest data from the Federal Reserve. As Bloomberg points out, banks’ appetite for government bonds has remained relatively robust since the onset of the financial crisis. American banks now hold almost US$1.7trn in treasuries and related government debt, with holdings growing by an 11-12% annual clip so far this year, despite miserly yields.

The situation at Japanese banks looks eerily similar. Funds are being recycled into government bonds instead of loans, with year-on-year credit in a seemingly permanent state of contraction. The Economist Intelligence Unit does not expect America to experience a protracted slump like the one that has dogged Japan since its spectacular asset-price bubble burst in early 1990s. Still, there are enough similarities in some metrics to cause discomfort.

Encouragingly, deposits at American and Japanese banks are at or near record highs. This will please regulators, who are urging banks to avoid flightier wholesale sources of funding. But until these funds are put to more productive use than stockpiling low-yielding government bonds, nobody will be truly happy.

In most large countries, loan growth of 17% would represent a breakneck pace. In China, such growth is perceived as sign of a slowdown.

In May, the value of China’s outstanding bank loans rose by 17% from the year before, the slowest pace since late 2008. A series of interest rate increases and, more importantly, hikes to banks’ reserve requirements appear to be cooling the stimulus-fuelled surge in lending recorded in the months after the global financial crisis. The latest boost to reserve requirements, announced today, is the sixth hike so far this year. More increases are likely in the coming months, as worries persist over rising consumer inflation—5.5% in May—and a frothy property market. Still, the Economist Intelligence Unit expects China’s GDP to grow by 9% this year, only a modest slowdown from the 10.3% growth recorded in 2010. Despite the central bank’s tightening measures, credit conditions will remain relatively loose.

(Note: Some data in this post, and the accompanying chart, have been updated to reflect revised historical data.)

On June 3rd, Atlantic Bank and Trust of Charleston, South Carolina became the 45th bank in the US to fail this year. After a brief period in receivership under the control of the Federal Deposit Insurance Corporation, the lender’s assets—worth US$208m—were transferred to First Citizens Bank and Trust.

This is not an unusual occurrence: 367 banks have failed since 2008. But the pace of failures so far this year is slower than in 2010. And only five banks failed in May, which some see as an “encouraging milestone”. Recall, however, that three banks failed in March, promptly followed by 13 in April, the highest monthly tally since last spring.

More encouraging is that the size of failed banks so far this year is significantly smaller than last year—an average of US$430m in assets per bank through May this year, versus US$867m over the same period in 2010.

Analysts are poring over new statistics on debt exposure from the Bank for International Settlements released today. As has become customary with each quarterly release of this data, the report’s (virtual) pages are flipped directly to the section detailing the size of banks’ portfolio of bonds issued by governments on the euro area’s troubled periphery.

French and German banks are the most exposed, by far, to troubled government debt. Although banks have been reducing their exposure—the value of debt from Greece, Ireland, Portugal and Spain held by foreign banks fell by 35% last year—significant holdings remain. German banks, for example, were sitting on more than 40% of the US$54bn in foreign-held Greek government debt at the end of 2010.

The inevitable restructuring of Greek debt will be painful for lenders, although the severity will vary according to the method employed. In the meantime, attempts to cajole banks into a voluntary refinancing of Greece’s daunting debt pile (along the lines of the “Vienna Initiative” in central and eastern Europe) will continue, despite a glaring lack of incentives for lenders to take part.

The number of reports of suspected mortgage fraud in America rose by 5% last year, to a record annual high, according to the Treasury Department. But a new study by the LexisNexis Mortgage Asset Research Institute, which collects its own data on mortgage fraud, claims that cases of “verified, material misrepresentation” in the mortgage origination process fell by 41% over the same period.

A stricter definition of fraud explains some of the difference with the Treasury’s figures, as does a general decline in mortgage lending, LexisNexis says. More worryingly, the company notes that “fraud has become more complex and harder to verify using traditional methods.” More than 90% of the fraud submissions received in 2010 dealt with loans written in prior years; with time, more fraud perpetrated in 2010 will likely come to light. Among the cases reported to LexisNexis last year, Florida saw three times as many submissions as its share of the national mortgage market. Fraud volume in New York and California was more than twice those states’ share of overall mortgage originations.

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

A series of tough measures, accompanied by equally tough talk, have made it clear that Bank of Israel governor Stanley Fischer is determined to prevent a crisis in Israel’s property market.

Israel’s latest directive imposing restrictions on the mortgage market was issued by its newly-appointed banking sector regulator, David Zaken, on April 28th and took effect on May 5th. It restricts the share of mortgages with adjustable rates that change at least once every five years to one-third of total lending. This restriction applies to all forms of financing in use in Israel, namely shekel floating-rate mortgages, loans linked to the consumer price index and loans linked to exchange rates (generally the shekel versus the dollar). According to the latest central bank data, these three channels comprise 48%, 32% and 6%, respectively, of total mortgage borrowing.

Read more at Financial Services Briefing: “Pre-emptive strike” (May 6th)

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