Banks Park $1 Trillion of LTRO Money Back at ECB

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Greek Debt Deal Merely Buys Time: World Bank's Zoellick

The latest Greek bailout totaling 130 billion euros would merely buy time, outgoing World Bank President Robert Zoellick said in an interview in Singapore with Reuters.

JHSB | ChinaFotoPress | Getty Images"It's too early to know, partly it depends on the actions the Greeks have to take," he said. "I think that the European Union has dealt with Greece as one element but the core elements are really going to be the success of some of the bigger countries, such as Italy and Spain."

But he said bailouts weren't necessary for these two countries or Portugal.

"Each country's situation is different and you really have three interconnected problems. For some it's the size of the sovereign debt, for some it's the effect on the banking industry, and for some it's their competitiveness," he said adding that "Spain and Italy need time to make the reforms."

"But I do think that all this is harder to accomplish when there is a recession in Europe."

Support from other European nations was also crucial.

"What I've tried to suggest, given the politics of reform in some of the Mediterranean countries, (is that) it will be important for Germany and other leaders in the process to show some prospects if the reforms are taken and how they will be supported by the other European countries."

Zoellick heads next to China for the release on Monday of a major economic report by the bank and a Chinese government think tank, looking at economic opportunities and challenges to the year 2030.

Global Economy, China and Oil

Zoellick said that prospects for global economic growth this year remain guardedly positive with much hinging on Europe stabilizing and China reaching a soft landing, with oil prices a wildcard.

"I have a cautious optimism about the international economy. Our forecasts are that growth might slow down a little bit this year. What I see is that the U.S. economy has got some momentum," he said.

"If Europe is able to continue to stabilize the situation, that's a big if, but that's an important part. And I think China has issues in the real estate sector but my own guess is they are on the process for a soft landing.

"The two big question marks to me are energy prices with the political risk and Europe being able to maintain things."

Brent crude futures settled near a 10-month high above $125 a barrel on Friday, posting a fifth straight weekly gain as heightened concerns over tensions with Iran about its nuclear program and cuts in supply sent oil prices up on both sides of the Atlantic.

The crude oil price spike has prompted speculation the International Energy Agency may again call for the release of oil stocks, or the U.S. may release strategic petroleum reserves.

Zoellick said oil prices remain a concern, though the World Bank is only an observer in any decision to release strategic oil stocks.

"Not my call," he said, adding that "I don't think one should rush into that but the reason that the strategic reserve was created was for use in emergency situations."

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Some Banks in Denial on Deleveraging Impact: Analyst

French and German lenders are in denial over the impact of deleveraging and the need to raise capital, Chris Wheeler, bank analyst at Mediobanca, told CNBC.

Some of Europe's biggest banks reported steep losses on Thursday and their executives warned the weak economy is likely to impact earnings further.

“Banks have told us about these wonderful deleveraging programs and in many cases they made very good progress. The problem is they seem to give us very skinny numbers on what that means in terms of lost revenue,” Wheeler said.

Analysts at Morgan Stanley estimate that European banks [.SX7P  Loading...      ()   ] will reduce their balance sheet by between 1.5 trillion euros ($2 trillion) and 2.5 trillion euros during the next 18 to 24 months.

Wheeler believes that French and German banks should consider tapping the investing public for capital, instead of selling revenue-generating assets.

“Why trade in some assets you might like to keep, why give away revenues, rather than just go to the market,” Wheeler said. “If you have a strong equity story, like a Deutsche Bank, like a BNP Paribas, deal with the capital issue and take a rather more leisurely view about deleveraging your balance sheet.”

Wheeler believes that the next three-year long term refinancing operation (LTRO) by the European Central Bank will be crucial to getting banks back on a solid footing.

“It’s only three-year money but it’s a matter for the banks to try to get themselves sorted out in terms of longer-term funding needs,” he said, adding that the operation will not sap demand for bank debt.

“One of the good pieces of news in the LTRO is that you’re going to get into a situation where banks are seen as desperate to raise debt, therefore the ECB can be a bit more selective and have a little bit more time to get into the market and start to create a buoyant private market for bank debt again,” he said.

Disclosure:

Mediobanca has a neutral recommendation for the European banks sector and favors Italian and UK banks, specifically Banca Popolare di Milano, Intesa Sanpaolo, Banca Generali, Credito Emiliano, Barclays, Standard Chartered and HSBC.

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How Do We Wean Banks off ECB's Liquidity?

 Highlight transcript below to create clipTranscript:  Print  |  Email Go  Click text to jump within videoThu 23 Feb 12 | 04:30 AM ET Chris Wheeler, bank analyst at Mediobanca, told CNBC, "obviously we have had a 38 percent rise in the European bank sector since the LTRO effectively and that shows just how important it was to shore up the liquidity issues with the banks, it is a matter of the banks trying to get themselves sorted out in terms of their longer term funding needs."

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Run on European Banks Still Possible: Economist

A run on European banks that would create systemic risks is still possible if a major financial institution gets into trouble, Brad Bourland, chief economist and head of proprietary investment at Jadwa Investment, warned in a CNBC interview.

Keith Brofsky | Photodisc | Getty ImagesAsked where a Lehman type of event would happen if it were to happen again, Bourland said: "A major European bank. A commercial bank. The German and the French are capable of taking care of their banks but last week S&P downgraded 26 Italian banks."

"So if there is a series of failures in one of the weaker countries of a banking sector — in Europe you don’t have the same deposit guarantee insurance universally like you do in the US, so you never had a run on a US bank, people lining up to get deposits out. But if you have several banks, or a significant bank fail and you will have a run," he added.

Speaking less than a week before the launch of the European Central Bank’s second long term refinancing operation (LTRO), he suggested the safety net for the banks was not enough.

Markets are anxiously anticipating the size of the ECB’s second LTRO, with estimates ranging from 500 billion euros ($665 million) to 1 trillion euros.

Despite this uncertainty, Bourland, who manages a $400 million proprietary portfolio, said he was still buying risk, “Just not in Europe. We like high growth, emerging markets. We like private equity and real estate.”

But for now, buying into the Greek market is one step too far, he said.

“I would love to buy Greek real estates,” Bourland said, “Or some Greek assets, but not at German prices. So wait until it breaks. Maybe Greece leaves the euro, maybe it has a dramatic internal devaluation, something has to happen before it gets interesting for external investors.”

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Meredith Whitney: Not A Lot of Growth in Big Banks

 Highlight transcript below to create clipTranscript:  Print  |  Email Go  Click text to jump within videoWed 22 Feb 12 | 08:55 AM ET Weighing in on why there is not a lot of growth in bigger banks, with Meredith Whitney, Meredith Whitney Advisory Group founder/CEO.

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Aimed at Banks, Volcker Rule Hits Unlikely Targets

Some public agencies that rely on the municipal bond market for financing fear a landmark financial reform rule will cripple their ability to sell bonds and make it more expensive to raise money for crucial services.

The Volcker Rule was designed to curb the risks that banks take with depositor dollars, a practice known as proprietary trading. But the rule risks ensnaring public agencies ranging from housing agencies to hospital authorities because the way muni bonds are sold and traded results in banks risking their own capital — the very practice banned under the Volcker Rule.

Also, although the rule, a key component of the Dodd-Frank reform law passed in the wake of the 2008 financial crisis, did include an exemption to ensure that state and local governments would still be able to raise money in the municipal bond market, it left a gaping hole.

As a result, state and local authorities are worried the rule will inhibit banks from underwriting bonds and trading, inadvertently driving up water and sewer bills, delaying public transportation projects and making affordable housing more scarce unless changes are made.

The rule exempts about 60 percent of municipal bonds from the restrictions on banks' proprietary trading.

Bonds issued by states and their political sub-divisions — such as counties and cities — will be excluded from the ban, but debt issued by public agencies or authorities would be subject to the restriction.

"It could have a very detrimental effect on trying to make the investments in public infrastructure that many of us have felt could be and should be the core of economic recovery," said Washington State Treasurer James McIntire, who otherwise supports the Volcker Rule.

While proprietary trading in many markets is associated with dealers taking positions to try to profit from movements in a security, in the highly illiquid $3.7 trillion municipal market dealers are usually risking their own capital just to facilitate trades, said the Municipal Securities Rulemaking Board (MSRB), in a letter to federal regulators last month.

That would hurt issuers' abilities to even sell debt in the first place, as three-quarters of the new bond issues in 2011 were underwritten by banks that would have to follow the rule.

That, in turn, will force issuers to delay projects or pass on hefty bills to taxpayers because of a distinction brokers, dealers, underwriters and issuers describe as arbitrary, unclear and unintentional. Most blame the narrow definition on oversights in drafting the proposal.

The MSRB, the market's self-regulatory organization, openly criticized the definition last month, and many believe that because it took the rare steps of objecting to a federal proposal, the final plan will be less stringent. The chairman of the Securities and Exchange Commission, Mary Schapiro, signaled recently the commission is considering widening the exemption.

"I think their intention was to try to restrict esoteric, non-traditional stuff. I do think it will create a bifurcated market if it were to occur," said Tom Metzold, co-director of the municipal bond department at Eaton Vance in Boston. "I really do believe they will correct their mistake."

Tale Of Two Water Authorities

Many states require what is known as "competitive underwritings" in the muni market, where underwriters bid on a bond issue with the expectation that investors will later buy the debt. That assumption means banks run the risk of holding a lot of unsold debt — and risking their own capital, which would be banned under the Volcker rule.

George Friedlander, a Citigroup [C  Loading...      ()   ] municipal bond strategist, said this would diminish price discovery, increase volatility, push up yields, and threaten liquidity because most banks would be banned from market-making activities.

Agencies that are not exempt will also have to spend more on underwriting and legal counsel in properly structuring their bond issues, or simply in going through regulatory fine print to confirm the law applies to them.

The rules could lead to inconsistencies. For example, the District of Columbia Water and Sewer Authority and the Washington Suburban Sanitary Commission in neighboring Maryland are more than similar.

They are linked through a joint $2 billion project to clean up nitrogen at the Blue Plains wastewater treatment plant that serves Washington, Virginia and Maryland. The Washington suburban commission is a customer of the D.C. water authority as well, said Timothy Firestine, chief administrator for Maryland's Montgomery County and vice chairman of the D.C. authority.

But the city authority could end up paying more when it borrows for projects — including the nitrogen clean-up — than its suburban sister. Because the agencies have slightly different relationships with their local governments, they could end up on opposite sides of the Volcker Rule, Firestine said.

"Homeowners in the District, and even the federal government, would pay higher rates on their water and sewer rates," Firestine said. There is confusion about "who's in and who's out," he added.

Washington State's McIntire pointed to two public corporations created by local governments in his state as examples: authorities for the famous Pike Place Market and for the Seattle Art Museum. Their bonds would be hit by those restrictions, even if guaranteed by the city. But bonds sold by the city for the same purpose would be exempt.

For those not exempt, it would be "more difficult for many of these entities to get to market. There wouldn't be as many banks that would be able to work with them," he said.

Investors, knowing they were buying bonds that would have limited liquidity, would likely want higher yields. Individual buyers might begin to spurn municipal securities if some are deemed too risky for banks to buy, said the treasurer for Iowa, Michael Fitzgerald.

"When there's confusion, grandma or anyone else buying bonds stay away," he said. "This is more work for the underwriters to do and the costs go up."

After the federal agencies sift through comments, they will release a final plan for enforcement beginning in July.

One of few voices calling to maintain the narrow definition is Occupy the SEC, an Occupy Wall Street offshoot that submitted a 325-page comment on the proposal. It cited Alabama's Jefferson County sewer authority, which pushed an entire county into bankruptcy through complicated financing, and to scandals where banks overcharged municipalities for investments.

"Stated plainly, an additional exemption for municipal agency bonds would be harmful to the banking system, as it would encourage banks to continue...their attention on remote, highly unregulated markets in quasi-governmental securities that are already rife with abuse," the group said.

Higher Bills For Affordable Housing Agencies

In the call for a wider exemption from the Volcker Rule, housing authorities are among those making the strongest pleas.

All 50 states have agencies to finance affordable housing, which like some other agencies were created so investors would know governments were not being profligate with general debt issuance.

The National Council of State Housing Agencies, in a letter to federal agencies seeking an exemption, cited the debt's "proven track record of safe and sound performance." Without an exemption, it said, agencies could struggle paying for rental and down-payment aid, loan servicing, and homeless programs.

Fitzgerald of Iowa noted that his state created its housing authority in the 1970s to handle borrowing instead of issuing direct state bonds in order "to pacify the public and say 'we're conservative Iowans."

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