Ranting into the ether about banks

[ursus arctos]

The compliance post-mortems on Archegos are going to be very interesting

The fee-hungry investment banks were ravenous for Hwang’s trading commissions and desperate to lend him money so he could magnify his bets. Those included taking outsized positions in stocks such as Chinese technology company Baidu and US media giant Viacom.

“It’s pretty hard for me to defend why we loaned him so much,” said an executive at a bank with billions of dollars of exposure to Archegos.

Nomura on Monday morning warned it was facing $2bn in estimated losses, and Credit Suisse then said its potential losses could be “highly significant and material to our first-quarter results”. Three people close to the Swiss bank suggested the eventual figure could reach $3bn-$5bn.

[ursus arctos]

https://twitter.com/reuters/status/1377166310946136074

[Ginger Yellow]

“It’s pretty hard for me to defend why we loaned him so much,” said an executive at a bank with billions of dollars of exposure to Archegos.

It's not quite the situation here, but it reminds me of every time banks get caught out margin lending to executives for shares of their own companies (Steinhoff springs to mind as a recent example). The wrong way risk is insane, yet they keep doing it. I suppose it's marginally better than putting the wrong way risk on their customers, like they usually do.

[Ginger Yellow]

Heh, nice timing, BIS:

Basel Committee issues principles for operational resilience and risk

[Ginger Yellow]

How bad do you have to be to get fined by Guernsey?

More than 97% of the clients onboarded were in breach of local regulations

[caja-dglh]

Archegos is amazing. Amazing in that Credit Suisse had twenty billion exposure to them but it didn’t make their large exposure risk report because of some problem aggregating systems or whatnot.

They really ought to fire their head of technology as well as each and every person that prevented them getting budget to achieve something so fundamental (and common to be stopped by those holding the purse strings to fund buybacks)

[Ginger Yellow]

Amazing in that Credit Suisse had twenty billion exposure to them but it didn’t make their large exposure risk report because of some problem aggregating systems or whatnot.

Is it that or more that the risk models said they didn't have $20bn exposure to them, because of collateral?

[Ginger Yellow]

This thread, basically:

https://twitter.com/jeuasommenulle/status/1379419455818698753

[ursus arctos]

And there are now reports that the exposure may have been 4 times that.

I am not at full liberty to discuss this particular incident, but wowza.

[caja-dglh]

Whatever it turns out to be it is a massive misunderstanding of Enterprise risk reporting. That Twitter thread is good, but it also shows that (if that is the case) they don’t understand their business wrt Prime Brokerage. Counterparty credit risk is not new and running that size of exposure on the most simple terms to any hedge fund is insane. Just simply looking at AUM tells it is overlevered to you, let alone any other banks.

[ursus arctos]

That is one of the aspects I am not at Liberty to discuss

[Ginger Yellow]

Of course, not disputing it's terrible risk management.

[caja-dglh]

For sure! I am just wearing my “get to analyze someone else’s disaster” hat. I shouldn’t be surprised given what I have run up against. A two year battle to get the FX traders to agree to checking counterparty exposure limits before trading was one.

ultimately - as was hinted to in articles - once a business starts to become a revenue driver your risk managers are in a world of pain.

[Ginger Yellow]

CBI making the UK FCA's HBOS investigation look speedy:

On 10 June 2021, the Central Bank of Ireland (the Central Bank) imposed a fine of €200,000 on Mr McCollum, disqualified him from being a person concerned in the management of a Central Bank regulated financial service provider for a period of 15 years, and reprimanded him for his admitted participation in breaches of financial services law in relation to commercial lending and credit risk by Irish Nationwide Building Society (INBS) that occurred between 1 August 2004 to 30 September 2008 (the Relevant Period).

Mr McCollum was Head of Commercial Lending (UK) and UK Branch Manager (Belfast and London) during the Relevant Period. He has admitted to participating in significant failures by INBS to adhere to its own policies at each stage of the commercial lending and credit risk processes, resulting in poor risk management, ineffective governance and high risk lending.

Mr McCollum joined INBS in 1997, at a relatively early stage in its entry into the development finance market. INBS’s strategy at the time was to build its commercial lending through repeat business with high net worth individuals with whom it already had strong relationships. Fast growth strategies and rapid credit decisions were the backdrop against which INBS’s commercial loan book grew by 128% in value from around €3.6bn at the end of 2004 to around €8.2bn at the end of 2008. A significant percentage of this exponential growth was related to increased commercial lending in the UK through the branches for which Mr McCollum was responsible. INBS’s UK commercial lending grew from €2.957bn in 2005 to €5.186bn in 2007 and comprised over 50% of the value of INBS’s commercial loan book in that period.

[Ginger Yellow]

I'm not particularly well versed in parsing central banker speak, but the ECB has officially changed its inflation target from "close to, but below 2%", to 2%, which in principle implies a more dovish stance, though it's pretty damn dovish at the moment. Also a bunch of climate stuff which is pretty wishy washy at the moment, but may actually result in concrete changes in a couple years. Though I wouldn't hold my breath on it being meaningful in practice. "Financial stability", ie banks having enough collateral to post and there being enough assets to effect QE, is always going to win out over moral or longer term practical concerns.

[caja-dglh]

I have read these changes as more a confession that low interest rates has caught their policy out a little. It is certainly a more dovish stance, but basically saying that they expect inflation may arrive but they won't have the other elements of recovery they are looking for. The Fed has pinned this all around "transitory" inflation and the change to long run targeting.

It feels like they are basically accommodating a Japan scenario as the base case.

[Guy Profumo]

One fewer of them to rant about

Tesco Bank to close all customer accounts:



https://www.theguardian.com/business...nd-of-november

[Walt Flanagans Dog]

One fewer of them to rant about

Tesco Bank to close all customer accounts:



https://www.theguardian.com/business...nd-of-november

I'm guessing the reason why most of their account holders weren't actually using them as their primary current account was that back in the day they used Clubcard points to incentivise people to open them and once the minium time was up people moved onto other providers or offers. We used to have a "Clubcard Plus" account but they phased those out and tried to transition people into other Tesco accounts.

(and now I've actually read the article that does seem to be the case).

[Ginger Yellow]

It's been a long while in the making. They sold their entire mortgage book off a couple years back. Not much point in taking deposits if you're not doing any lending.

[steveeeeeeeee]

I've signed up to a few FinTech banks over the past 6 months, and whilst they are all quite handy, Starling Bank has become an absolute essential financial tool. The exchange rate and removal of charges makes transferring or changing money completely redundant. The ease of setting up a joint account means all our bills are now through Starling. The app is simple to use, notifications and security settings are just right. I recommend it highly.

[Ginger Yellow]

Today's rant about banks (looking at you, Santander): Stop building interactive websites for your financial results. Just give me a fucking PDF. And make sure it's searchable.

[Ginger Yellow]

On Archegos, CS put out results today, and alongside them published a report on how they fucked up. Turns out not only did they comically underestimate their exposure, even taking that into account they just completely ignored their risk limits. Then they weakened them. Then when they were still being breached, they continued to ignore them.

Archegos began regularly breaching its PE limit in the spring of 2020. By April 2020, Archegos’s PE was more than ten times its $20 million limit. At the same time, the fund’s poor performance had caused its NAV to decline so precipitously (from approximately $3.5 billion in February to $2 billion in April) that it triggered an optional termination event under the relevant swap agreement. Prime Services opted not to terminate the swaps portfolio, but CRM did ask the business to confirm its comfort with Archegos’s existing margin levels. The business responded that it “remain[ed] comfortable with the existing margin framework across” Prime Brokerage and Prime Financing.

...

By July 16, 2020, Archegos had over $600 million in net scenario exposure—more than 240% of the $250 million scenario limit. Within a week, on July 22, 2020, Archegos’s net scenario exposure had jumped to $828 million (330% of the limit). From that point on, Archegos remained in breach of its scenario limits virtually every week until its March 2021 default. In response, the business and Risk discussed various risk mitigation measures, such as a new, tiered margining model in which the aggregate bias of the portfolio would dictate the base margin rate and add-ons. Those discussions, however, trailed off and the new margining model was never implemented.
Archegos’s scenario exposure remained elevated, in the $800 million range, in August 2020, exacerbated by new long positions that Archegos put on with CS that month. By the end of August, Risk insisted that Archegos not expand its “already outsized” long positions at existing margin levels, particularly given the PE and scenario limit breaches. With PE more than 25 times the $20 million limit and the severe scenario exposure nearly three and a half times the limit, the business urged that Archegos not be evaluated on the “Severe Equity Crash” scenario that CS historically had employed, but rather on a more forgiving “Bad Week” scenario. The business contended this adjustment made sense because Archegos’s portfolio was comprised of large-cap stocks in liquid names and CS had a daily termination right. Risk ultimately agreed, and Archegos was monitored under the more lax scenario from September 2020 to February 2021. Despite this change, Archegos remained in breach even under the more lax regime. On September 1, 2020, after monitoring under the Bad Week scenario was first initiated, Archegos’s scenario exposure was nearly two times the $250 million limit.

[Ginger Yellow]

!!!!

Between March 11 and March 19, and despite the fact that the dynamic margining proposal sent to Archegos was being ignored, CS paid Archegos a total of $2.4 billion—all of which was approved by PSR and CRM. Moreover, from March 12 through March 26, the date of Archegos’s default, Prime Financing permitted Archegos to execute $1.48 billion of additional net long positions, though margined at an average rate of 21.2%.

[caja-dglh]

That's Matt Levine's newsletter written for today. What an embarrassment, though I am very familiar with how margin lending businesses love to try and play cups and balls as though there is some genius to what ought to be a very simple business.

[caja-dglh]

The Bank response is pretty good for showing that it wasn't just Archegos, but a profitable business allowed to run amok.

Prime Services reduced its RWA usage by ~55%, and its leveraged exposure by ~40% between end 1Q21 and end 2Q21

They then go to mention how this all fits into their values, which serves to tell you they don't really care about this at all and are feeling unlucky / sorry for themselves.