Central banks / bond markets

Is there a future for European banks?

The weakness of the European banking sector appears to be centering on Germany at the moment. Last week, two of our banks stood in the focus of market happenings. What must happen for the situation in the European banking sector to stabilize and improvement to become possible in the medium term? Huge upheavals were sparked off at Deutsche Bank when the US Ministry of Justice announced that the bank could face a 14 billion dollar fine. Commerzbank has announced yet another restructuring in order to strengthen its profitability. But the burdens on European banks are not merely confined to Germany. All EU countries are affected by this. Three factors are essentially responsible for the burdens facing European banks – low interest rates, regulatory requirements and the new rivals, known as the FinTechs. In Germany, the burdens are compounded by the existence of too many banks. This can be attributed to…

Central banks – when the exception becomes the monetary policy rule

Almost a decade after the start of the financial market crisis, the big industrialised nations still find themselves in an exceptional situation when it comes to monetary policy. In view of weak economic growth, ongoing disinflation and shocks exogenous to the market, such as the Brexit vote, three of the four major central banks are relying on “extraordinary” monetary policy measures – the ECB, BoJ and BoE. Criticism has been voiced that the central banks’ decision to take extremely expansionary measures is not purely the result of external circumstances. The central banks’ asymmetrical response functions (to economic cycles) are also said to have favoured these developments. The duration and scope of QE measures mean that they hardly deserve the attribute of “extraordinary” any longer. Instead, it looks like they might become the new monetary policy rule. The US central bank already stopped taking unconventional measures two years ago. Nonetheless, the…

The ECB’s monetary policy undermines reform incentives in the periphery

Euro area governments and the ECB are not pulling together. On the basis of its mandate and according to its own official statements the European Central Bank’s policy is aimed at guaranteeing monetary stability. In order to ward off the danger of deflation in the Euro area, the ECB is pursuing a highly accommodative policy, but this is enjoying ever less support from the national governments in the form of the implementation of structural reforms. Especially the periphery states are facing growing internal political resistance, which is clearly eroding their readiness to implement reforms and impose austerity measures. At the same time, the former crisis states are benefiting from the fact that the risk premiums on EMU government bonds are distorted to the downside because of the ECB’s policy and the incentive for commercial banks to hold government bonds. Given their high levels of debt these countries have an interest…

Target2 balances are drifting apart once more due to the ECB’s bond purchase programme

In recent months, the Target2 balances of the different Eurozone countries have been drifting apart continuously. The Target2 amounts due to Germany, Luxembourg, Finland and the Netherlands now total around EUR 950bn. In contrast, the central banks of the European periphery, in particular, have accumulated substantial liabilities to the Eurosystem. However, this is by no means a new phenomenon. A comparable trend was apparent in the period from July 2011 to August 2012 when capital fled the EMU periphery. The factor driving this development has, however, changed over time. The assumption is that the present rise in Target2 balances is closely associated with the ECB’s bond purchase programme, which has been in place since March last year. Accordingly, the rise in the positive Target2 balances in Germany, Finland, Luxembourg and the Netherlands is comparatively closely linked to the rise in the ECB’s bond portfolio. Both indirect and direct effects on…

Bank Lending Survey signals that lending is growing – How successful is ECB policy really?

As can be seen from the ECB’s July Euro Area Bank Lending Survey, the banks in the Euro area still expect increasing credit demand. Although the number of more optimistic banks has shrunk somewhat compared to April, they are nevertheless still clearly in the majority. Above all, the banks take a positive view of credit demand from enterprises and households. Nor do they plan to tighten their credit standards. That sounds good. So is there hope that the upturn in bank lending that is gradually emerging will pick up momentum and stimulate investment in the economy? Ultimately, this is what the ECB’s very expansionary monetary policy aims to achieve. A closer look at the statistics shows that the inundation of very cheap central bank funds has not been very efficient so far: while the volume of loans granted by commercial banks “to Euro area non-financial corporations” grew a considerable 3.1…

US labor market: Good June figures but overall deceleration in the employment trend

The official Employment Situation Summary, published last Friday by the US Bureau of Labor Statistics (BLS), confirmed the picture of a still robust employment trend. The fact that the unemployment rate is likely to decline at a far slower pace this year than in the previous year is essentially commensurate with our expectations and has therefore not come as a surprise. However, the June report also confirms that the employment trend in the USA appears to have passed its peak. This year so far, the monthly average increase in persons employed has amounted to around 170,000 compared with the same period a year earlier when the number of persons employed grew by around 220,000 persons. In 2014 the monthly increase even came close to a quarter million in the first half-year. Against this backdrop, the increase in the unemployment rate from 4.7 to 4.9 percent should not give cause for…

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