By Simon Miller
The year began with a prescient report from the World Economic Forum which warned that the world was not prepared for any further shock.
The European Union’s (EU) emission trading scheme faced embarrassment after fears that it may have lost as much as €30 million (£25 million) in a series of cyber raids. Exchanges including ICE Futures Europe, Nasdaq OMX Commodities Europe and LCH.Clearnet had to suspend trading of emissions contracts while the security breaches were investigated.
On the regulatory front, Solvency II dragged into the New Year with European insurers getting an extension to fully phase in the risk-based regime. Lloyd’s of London announced that it now expected to spend £300 million preparing its insurers for the EU’s Solvency II capital adequacy regime.
Politically, the UK’s Chancellor of the Exchequer George Osborne blamed the weather for poor economic data – this excuse would be joined by Royal
Weddings, strikes, summer and Europe later in the year.
The shortest month of the year saw Europe’s bill for bailing out banks costing over €2,000 billion according to Joaquín Almunia, the vice-president of the European Commission (EC) responsible for competition policy.
Also in Europe came a call to curb the commodity derivatives market. In what would become familiar during 2011, the EC ignored its own evidence of no linkage between commodity trading and price volatility and set up a review of the Directives on Market Abuse and Markets in Financial Instruments.
UK banks faced an increase in the rate of the bank levy following improved economic conditions with a two-month levy of 0.1 per cent to offset the lower rate of 0.05 per cent in January and February before moving to 0.075 per cent. The levy change will increase revenue by £800 million to £2.5 billion. The 2011 yield was forecasted to be £1.7 billion.
Christchurch in New Zealand was hit by a devastating earthquake killing 181 with an estimated NZ$30 billion (£14.6 billion) cost to insurers.
Financial Risks Today was unleashed onto an unsuspecting world covering the impact of the Arab Spring that saw popular uprisings around the region.
In a future echo to events at the end of the year, the European Parliament gave Prime Minister David Cameron a euro-headache with an endorsement of a Robin Hood tax on banks.
The Parliament voted 529 to 127, with 18 abstentions, in favour of a Tobin Tax which would be levied on each financial transaction by banks based in the EU at a rate of up to 0.05 per cent.
Six non-Eurozone countries joined the Euro Plus Pact, designed for further
economic co-ordination in the Eurozone. Following an EU summit, Bulgaria, Denmark, Latvia, Lithuania, Poland,
and Romania had joined the Berlin-inspired pact.
Japan was hit by an earthquake, tsunami and fears of a nuclear meltdown at the Fukushima power plant. The earthquake was 8,000 stronger than Christchurch’s and over 15,000 people lost their lives. The earthquake alone was estimated to cost up to $34.6 billion (£22.3 billion). The Bank of Japan offered ¥15 trillion (£0.12 trillion) to the banking system on 14 March in an effort to normalise market conditions while the World Bank’s estimated economic cost was $235 billion, making it the most expensive natural disaster on record.
The Financial Services Authority (FSA) and the Treasury published a joint review of the UK’s covered bond regulation. The review proposes a number of measures that aim to compete on a level playing field with those from other countries and increase the appeal of UK covered bonds to investors.
The Bank of Ireland breached its liquidity requirements in January and April this year according to its 2010 annual report. The bank blamed the temporary regulatory liquidity breaches on the “the contraction in unsecured wholesale funding, changes in the eligibility criteria of the European Central Bank (ECB) and increased usage of Monetary Authority funding”.
Ireland, which had already received a bailout from the International Monetary Fund (IMF) and the EU found itself downgraded to nearly junk status by Moody’s Ratings agency because of fears of further decline due to austerity measures and the rate increase in the Eurozone.
The inevitable happened as Portugal succumbed to sovereign debt pressures and went to the EU and IMF for a €78 billion bailout. Portugal joined Greece and Ireland in a bailout deal. The three year deal allowed Portugal more time to reach its budget deficit target where the deficit must be cut to 4.5 per cent of GDP in 2012 and 3 per cent in 2013.
Royal Bank of Scotland (RBS) became the second UK bank after Barclays to confirm that it was assisting US and European regulators investigating allegations of interest rate manipulation.
The EU agreed a common positioning on short selling at the Council of Economic Ministers. Stopping short of an outright ban, the EU adopted a two-tier system for transparency of significant net short positions: While at a lower threshold, notification of a position must be made privately to the regulator, at a higher threshold, positions must be disclosed to the market.
CFTC commissioner Jill Sommers told the Subcommittee on General Farm Commodities and Risk Management that other jurisdictions were not as far ahead in their reform programmes which “may harm the global competitiveness of US businesses”.
In a sign of what was to come, investors withdrew €3.1 billion from Italian mutual funds in June, the country’s asset management association, Assogestioni told reporters. Italian mutuals posted their 10th consecutive month of net outflows last month with €1 billion in outflows from bond funds while equity funds saw a €502 million outflow. Liquidity funds posted an outflow of €1 billion.
Moody’s Investors Service became the second ratings agency after Standard & Poor’s to warn that it may review the US’s rating for a possible downgrade. In a statement, Moody’s said that if there was no progress on increasing the statutory debt limit in coming weeks, it expected “to place the US government’s rating under review for possible downgrade, due to the very small but rising risk of a short-lived default”.
The ECB would only have to see its assets fall by around 4 per cent for its capital base to be wiped out warned think tank Open Europe. It estimated that overall the ECB was leveraged around 23 to 24 times, with only €82 billion in capital and reserves. As a result, should the ECB see its assets fall by just 4.25 per cent in value.
HSBC agreed to pay $62.5million to settle claims against the bank from a lawsuit involving Bernard L Madoff Securities. The bank has agreed to settle the claims pending in a class action pending in New York on behalf of investors in the Thema International Fund that had assets invested in Madoff
UK banks and building societies repaid 80 per cent of Special Liquidity Scheme loans according to the Bank of England quarter.
Preliminary talks began on creating a European rating agency in Frankfurt as a check on US-based firms.
Trichet told a hearing of the Committee on Economic and Monetary Affairs of the European Parliament that interest rates were not to blame for the troubles in peripheral eurozone countries.
Moody’s downgraded Portugal and Ireland to junk status while Greece was
downgraded to Ca.
Nearly a quarter of European banks would have failed the bank stress tests at the beginning of 2011 according to the European Banking Authority. The tests found that 20 banks out of the 90 tested would fall below the 5 per cent Core Tier 1 ratio (CT1R) threshold with an overall shortfall of €26.8 billion but the EBA allowed “specific capital increases” in the first four months of this year to be considered in the results.
Pension deficits could grow by as much as 45 per cent in the case of a European sovereign default according to Pension Insurance Corporation.
For the first time in two years, UK bonds were considered a safer bet than the US as politicians were deadlocked over budget talks which could have led to a US default. The yield on UK 10-year gilts touched 2.91 per cent while the yield on US Treasuries stood at 2.94 per cent.
US commercial banks and savings institutions reported an aggregate profit of $28.8 billion in Q2 of 2011 according to figures released by the Federal Deposit Insurance Corporation (FDIC). FDIC-insured companies saw a $7.9 billion improvement from the $20.9 billion in net income the industry reported in the second quarter of 2010 making it the eighth consecutive quarter that earnings registered a year-over-year increase.
The German president Christian Wulf questioned the legality of bond purchases by the ECB. The latest broadside from a leading German official came as Greece’s debt again reached the levels seen before the July agreement on a second bailout.
Irish Life & Permanent signed a deal to buy the deposit business of
Northern Rock Ireland. The UK nationalised bank has agreed the deal which would see some €650 million in deposits from around 17,000 customers go to the permanent tsb bank.
The EU agreed the next tranche of bailout for Ireland and Portugal following a Council meeting. Following a positive report into both countries’ austerity programme implementation, Ireland got €7.5 billion while Portugal
received €11.5 billion.
Switzerland moved to peg its currency as the euro continued to fall against the Swiss franc. The Swiss government set a minimum exchange rate of CHF1.20 (£0.94) to the euro and warned that it would enforce this
minimum rate with “utmost determination” and was prepared to buy foreign currency in “unlimited quantities”.
The German Constitutional Court rejected lawsuits against the eurozone bailout but warned of no more “blank cheques”.
The Independent Commission on Banking (ICB) ruled out a complete split in universal banking in its report but, as expected, ring-fencing of retail activities was recommended. The 363-paged ICB report rejected the complete separation of banks as it could lead to higher economic costs and it was not certain whether a complete split would make for greater stability. Instead retail arms of banks will be ring fenced with up to a third of UK banks’ balance sheets estimated to be inside the ringfence with global wholesale banking on the outside.
UBS lost $2.3 billion in unauthorised trades conducted by its trader Kweku Adoboli. The figure was $0.3 billion more than originally thought and came from unauthorised speculation in various S&P 500, DAX and EuroStoxx index futures over the previous three months. Adoboli is currently awaiting trial in the UK.
The EU conceded to UK objections over a proposal to make the Paris-based European Securities and Markets Authority responsible for the surveillance and registration of OTC trade repositories. With 75 per cent of OTC trades originating in London, UK legislators were worried that this would damage the City as the principle European market.
Belgium agreed to nationalise Dexia Bank Belgium following agreement from France, Belgium and Luxembourg to rescue the troubled bank. As a result, Belgium paid €4 billion to buy Dexia Bank Belgium, the largely retail Belgian division, which has 6,000 staff and deposits totaling €80 billion from 4m customers. In addition, the bank secured state guarantees of up to €90 billion to secure borrowing over the next 10 years. Belgium provides 60.5 per cent of these guarantees, France 36.5 per cent and Luxembourg 3 per cent.
The Bank of England voted to increase its quantative easing programme to £275 billion, £25 billion more than was expected. The Monetary Policy Committee voted to increase its asset purchase programme by £75 billion in the light of the slackening in global expansion.
Bank offices were raided as part of an investigation into the manipulation of the Euribor rates. The EC expanded its anti-trust probe into the alleged exploitation of how European banks agree lending rates to each other. In total more than 40 banks set the benchmark which determined interest rates on trillions of euros worth of euro-denominated loans and debt instruments.
The EU aimed to crackdown on high frequency traders through the proposed Markets in Financial Instruments Directive 2 (Mifid2). The proposed rules demand that high frequency trading in shares or other securities are bought and sold at around the market price.
China warned that it is not the saviour of the eurozone after the head of the European Financial Stability Facility (EFSF) left the country without a deal. With $3.2 trillion of foreign reserves, China was a key target for the new rescue plan which aims to raise €1 trillion for the EFSF through a special investment vehicle. However, EFSF head Klaus Regling left Beijing empty-handed after a weekend of talks.
Two European governments fell this month to be replaced by technocrats. Greece’s George Papandreou and Italy’s Sylvio Berlusconi resigned over continuing rows with the EU over austerity measures. Italy’s 10-year bond yield passed 7 per cent for the first time raising concerns over a default.
Moody’s called into doubt the EFSF’s ability to fund itself. Following a €3 billion 10-year bond issuance by the EFSF, the ratings agency said that the weak demand for the sale called into question “the ability of the EFSF to fund itself in the markets at low cost.”
The UK announced it was to sell an extra £11.4 billion of gilts following the revised outlook for the economy.
In its November 2011 Economic and Fiscal outlook, the Office for Budget Responsibility revised the forecast for the 2011-2012 central government net cash requirement to £135 billion, an increase of £14.6 billion from the budget in March 2011.
The world’s leading central banks enhanced their capacity to provide
liquidity support to the global financial system – in effect provide the US dollar overnight index swap rate plus 50 basis points – amid unsubstantiated rumours that central banks had to intervene to prevent a French bank going bust.
The Financial Policy Committee warned that the continuing sovereign and
banking debt risks in Europe remain the most significant threat to the UK. The FPC said that given the current “exceptionally threatening environment”, it recommended that if earnings were insufficient to build capital levels further “banks should limit distributions and give serious consideration to raising external capital in the coming months”.
The European Union itself was put on a downrating watch by Standard & Poor’s (S&P), if the agency decided to downgrade either France or Germany or both.
After hours of tense negotiations, the UK Prime Minister David Cameron effectively vetoed an agreement on another EU rescue deal after failing to secure protection for the country on potential actions such as a financial transaction tax.
The Financial Services Authority (FSA) admitted flaws in its supervisory
approach to the near-collapse of the Royal Bank of Scotland (RBS). Despite concerns and uncertainties over RBS’s underlying asset quality was subject to fundamental analysis by the regulator according to the long-awaited report.