Category: eco

Are banks too big? Should they be downsized or chopped up in smaller parts? The consensus seems to be “yes”, but is the consensus right? This is the topic of “The good, the bad and the big: is there still a place for big banks”, a book chapter by Wilfred Nagel, CRO of ING Group, and myself, published in SUERF-study 2014/2 “The value of banks and their business models to society”.

We argue that there are valid reasons for banks to grow bigger, such as gains in efficiency, profitability and diversification. But bigger banks may also be more difficult to manage. That is in itself no reason though for intervention by policymakers. Size diseconomies will affect the return on equity, which is first and foremost a concern for shareholders.

The one reason for policymakers to care about bank size and intervene, is “too big to fail” (TBTF) and the ensuing taxpayer risk. But banks and regulators are currently implementing far-reaching changes that much reduce the chance taxpayers ever have to step in again. TBTF is being addressed effectively by Basel-III, a clear liability seniority ranking and Recovery and Resolution Plans.

We therefore advise policymakers to avoid overshooting. Do not overreact by striving to eliminate or split each and every big bank. Instead, we argue that both financial stability and the economy are best served by a diverse banking landscape inhabited by different types of banks.

The full text can be found in chapter three of SUERF-study 2014/2 (pdf).

In het ING-weekoverzicht van deze week:

• Rusland begint de financiële gevolgen van de Krim-annexatie te voelen, maar Europese consumenten en producenten laten zich er niet door uit het veld slaan.
• De Bundesbank lijkt de nucleaire optie niet langer uit te sluiten, maar desondanks verwachten we weinig vuurwerk van de ECB komende week.
• In Focus: het vertrouwen van Nederlandse consumenten en ondernemers is de afgelopen tijd gestaag verbeterd. Binnen de EU is Nederland inmiddels een middenmoter.

Lees hier de volledige publicatie.

Worries about US inflation being too low are very 2013. US January CPI edged up to 1.6%YoY from 1.5% in the previous month. Energy was the main contributor, with electricity, gas and fuel oil rising sharply. Core inflation, excluding food and energy, actually decreased 0.1%-point to 1.6%YoY. Rents were the main driver of core inflation this month, rising 0.3%MoM. And there probably is more to come later this year. Rents follow house prices developments with about a 1.5 year lag, as rising house prices slowly push people towards rental homes. The lag means that most of the 10+% house price increase of 2013 has yet to feed through in rents. Shelter contributed 0.7%-point to inflation in 2013, but this could rise above 1%-point later this year. This will not push inflation into Fed panic territory anytime soon, but rents are a component to watch nonetheless this year.

US housing starts fell 16%MoM in Januari to 880k (saar), well below consensus. Although the previous two months always looked inflated, this is a rather steep correction. The generally less volatile single-family component of housing starts also fell back -16%MoM, and now is 6.7% lower than a year ago. The bad weather is widely blamed for downside surprises from the US lately; is that the case here as well?

The answer is probably at least partly yes. Issuance of single-family building permits fell a much more benign -1.3%MoM. Permit issuance is still slightly higher than a year ago. That is encouraging: builders have not yet seen reason to ask for far fewer permits. The sharp drop in homebuilder sentiment, published by the NAHB yesterday, was also largely driven by fewer sales and less traffic of prospective buyers. Both could be attributed to bad weather.

But bad weather cannot be all of the answer. Homebuilders have also become less optimistic about prospects forin the coming six months. Moreover, mortgage applications for house purchases, published by the MBA earlier today, show a further decline. Applications are hovering some 15% below levels a year ago. It seems that higher mortgage rates, induced by the Fed’s tapering, are also taking their toll on the housing market. We will get a clearer picture of the true state of the housing market once the snow has melted.

In het ING-weekoverzicht: Beleggers zetten deze week hun roze bril weer op, ondanks dat Amerikaanse macrocijfers het even laten afweten. Europese cijfers waren beter. Maar zoals één Valentijnskaartje niet voldoende is om de liefde te bestendigen, zo is gematigde groei niet voldoende om het Europese economisch herstel zeker te stellen.

Lees hier verder.

US pending home sales fell 8.7%MoM in December. November was also revised downward. Pending home sales, an early indicator for final existing home sales, are now 8.8% lower than in December 2012.

This is a nasty surprise, that is probably partly explained by adverse weather conditions in December. It is unclear however to what extent bad weather explains sales weakness. A few bits of good news are that mortgage rates have stabilised since December, and the number of mortgage applications has also recovered to pre-December figures. There is therefore some ground to believe that today’s plunge in pending sales is a one-off that will party be reversed in the coming months. Still, it is very clear that the housing bonanza of late 2012 and early 2013 is over. The Fed’s tapering is not without consequences, and the housing market is shifting in a lower gear.

November US home prices as measured by the Case-Shiller 20-City index posted a 0.9%MoM gain (sa), down from 1.1% in October. Prices are now 13.7% higher than a year ago. Prices are holding up quite well, despite the fact that other indicators are pointing towards a slowdown. Mortgage rates went up quickly after Fed-chairman Bernanke first pondered tapering in May 2013. Sales went down with a lag after the Summer. Tight supply explains why prices remain firm despite that. The inventory of homes for sale is 5.1 months’ worth of supply, which is still comfortably below the long-term average of around 7 months.

We do expect price increases to decelerate in the coming months. With fixed mortgage rates up to 100bp higher than a year ago, demand-induced upward pressure on prices should soon diminish. That said, tight supply should ensure that the deceleration of price increases should be gentle.
Recent housing market data may have been soft, but today’s home price data confirm that the housing market provides no reason for the Fed to get cold feet about further tapering.

December US existing home sales edged up 1.0% to 4.87m (saar) from a (downwardly revised) November figure, slightly below the consensus. While this concludes the best year for sales since 2006, the last two months of the year were rather weak. This is no surprise, given that mortgage rates have risen substantially during 2013, which is now feeding through in sales figures.

Supply remains tight on the housing market. The inventory of homes for sale represents 5.0 months of supply, still well below the long-term average supply of around 7 months, keeping pressure on prices for now.

But we expect sales to remain weak in the coming months, as higher mortgage rates continue to take their toll. That said, the housing slowdown should remain muted. Mortgage rates have not risen further since the Fed announced in December that it would start tapering. The Fed has successfully decoupled tapering expectations from rate hike expectations – for now at least. And indeed the number of mortgage applications for purchases, after having fallen substantially during 2013, is stabilising in the past two weeks. While it is too early to declare this a signal rather than noise, it is a hopeful sign and we will be closely monitoring both rates and mortgage applications in the coming weeks to see where the housing market is going.