STOP YOUR CUSTOMERS FROM SPENDING MONEY
American financial journalist Ellen Brown has a new essay out about the madness of banking. It’s not new news, but it is written in a very accessible style, and devoid of chest-prodding.
In the piece, she reiterates the point that the vast majority of banks in 2014 do not want your money to lend it to others and make a turn on it (as in the very old days of British mutuals, for example): they want the deposits for the convenience of being able to say to the authorities that they have more than enough liquidity to enable them to loan out money to folks.
If that doesn’t make sense, fear not: it is a ridiculous way to think….and it gets worse. Since the 2008 fiasco, banks must restrict their percentage of wholesale market borrowing, and so it suits them to have your dosh. But they do not class this ‘sight’ money as an asset: it’s a loan from us to them, you see. That’s why we’re really creditors, hoho. No, the assets are chiefly the loans they’ve granted to borrowers.
If that strikes you as madder still, then well done, you have a properly functioning brain. But here’s the final lol bit: when banks grant people or companies a loan, they don’t take money from the liquidity and turn it into an asset….which would be logical. Nope: what they do is create the money in the accounts. They literally fashion it from thin air. They lend people money they don’t have. In fact, they lend people money they never had. And it goes down as an asset.
It’s what you might call “a licence to print assets”. This is fractional reserve banking mateys, and it is without question the greatest scam in the History of the World.
Now yesterday, some of you will have seen me being less than serious about the ECB/EBA stress tests. This is because carrying out one of these exercises is like operating on a patient who isn’t ill yet. The banks are almost certainly mortally wounded, but the amount of derivative exposure the bank has is not only safe so long as it stays in The Cloud: it is incalculable if it doesn’t. So either way, the examination via stress test is utterly pointless.
Just how pointless is evidenced by the fact that Deutsche passed with flying colours, whereas I and most people I know wouldn’t touch it with a two-mile bargepole while wearing full anti-radiation protective clothing. But that’s not important right now (although one day it will be) because what I’m doing here is connecting some on-the-ground experience over the last year with the Rules of the Game up there at the European Banking Authority (EBA). This is, potentially, a very dangerous thing to do, for two reasons: first, because one’s making qualitative observations about a quantitative sector; and second, because living as I do in France, this could earn me a whopping fine. Such is the nature of free speech in 2014. We non-violent extremists have to watch our step.
So for that reason alone, I can’t name the bank. But what I can do is link together a series of events, tell you about some simple research I conducted, and then relate these to the stress test results that Uncle Mario has been anxiously awaiting.
Remember that I said how important customer deposits (that we loan to the bank, allegedly) are whenever there are regulators and inspectors around? Well I have a very large sum of money deposited with my French bank, but there’s a problem: they don’t seem to want me to spend any of it.
In a very concertina-style summary, this is the story so far. I get a new bank card and find I can’t get more than €150 out at any time, so I ask them for a higher ceiling and a new cheque book. This request is then studiously ignored for three months. Then I jump up and down and threaten to withdraw all the money, and am immediately smothered in managers, account executives, new cheque book, and a new ceiling of €1000 euros per day.
All goes well until three days later, when I try to withdraw from an ATM, and the request is refused. So I go into the branch and ask why, and they say oooo, no idea, press a couple of buttons and bingo, it works again. For a week. Then the same thing happens.
The following week, I try to wire some money to Greece and am told by my bank that the IBAN number is wrong. I check the IBAN again with the Greek recipient, and also on the IBAN-finder site. It is not wrong. So I go to a free private service and send the money anyway. The ‘glitch’ is never explained.
The next week, my ATM withdrawal limit comes down to €250 euros a day, then 200, then 150, then a refusal. I try to wire some money to Poland, but that won’t work. On the bank’s site, I am abruptly told that “permission to perform this function has been withdrawn”. I ring up my account executive. She tells me I have to come into the branch to do it. Which is, you know, a deranged answer, but WTF. I go into the branch and they say there is a limit of €6000 for bank transfers. Why, I ask. There just is, they say. So I go home and try to wire the money, and again it doesn’t work. So I send the money by UKforex from an English account instead.
Finally, last Friday, my card is refused at four different shops, two petrol stations, and an ATM. But when I get to the bank ooooh dear, it’s 4.59pm, and the grilles are coming down. This is France, and closed means closed.
Even before this last problem, I had begun to get a few uncomfortable vibes about what was going on. So since then, I’ve phoned either direct (or using friends as an introduction) seventeen High Net Worth customers of this bank.
Seven of them have had the same problems this year.
On its website, once it had passed the stress test, my bank trumpeted, ‘The Dingdong Group has exceeded the regulatory minimum capital requirement (9% at end June 2012), with a Core Tier One ratio of 10.4%, and confirmed its ability to withstand sovereign risk’.
Which sounds like they got through fairly comfortably. And perhaps, if they’re blocking around 40% of HNWI depositors from spending, it’s not surprising. But there is also a positive spin advantage which might explain what’s going on.
While I was surfing around for the whys and wherefores of this little saga, five days ago the Wall Street Journal – in anticipating the result – wrote this:
‘Ding Dong has seen its capital base grow strongly, although a lot has come from investment gains in its insurance unit….[it is] valued at less than 0.9 times book value [and] has a lower book value multiple of 0.6 times. A credible-enough stress-test result could see these kinds of banks rerated…..Their share prices could leap sharply.’
Take a look at Ding Dong’s financial accounts for 2013, and you can see a very big motive for purposeful glitches in the deposits field: for the same reason already outlined, I cannot show you a page capture for Ding Dong, but I can tell you that during 2011-2013 period, its customer deposits fell from €959bn to €913bn. That was a drop of 4%. During the first half of 2014, customer deposits rose by 3.8%, in what the bank itself describes as ‘a persistently sluggish market affected by the gloomy economic environment, and an unfavourable regulatory context‘. Or put another way, a stress test….during which regional bank income fell by 5.3%.
Just fancy that.
Ding Dong Bank was never going to fail the stress test. But it would be very handy indeed for the bank if its share price rose. I can’t help feeling that I’ve been dicked around so they could try and grasp that opportunity. And for the next few days, I shall be seeing if those Ding Dong shares go ring-a-ding-ding.