Welcome to the third edition of our regular briefing on news and views on the FIG (financial institution group) world.

These are the stories and insights that have captured our attention in recent months.

You can download a pdf version of the newsletter here

Why it Pays to Pay Attention 

Exploring why “there is no substitute for fundamental research” when looking for early warning distress signs. 

Is Sovereign Debt the next Crisis?

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Nine months since the start of the pandemic, we argue that despite increasing provisioning costs and declining net interest income, the banking sector is relatively better placed to withstand the potential economic fallout of Covid19 than it was the financial crisis of 2007-12. 

Starting with Capital Adequacy, the most fundamental measure of a bank’s ability to withstand stress, bank core equity tier one (CET1) ratios pre-crisis averaged 7.5% of risk weighted assets in Europe in 2007,

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Fears of a COVID induced repeat of the banking crises from 2008 and 2012 have abated thanks to Central Bank liquidity and the regulatory reforms introduced since then. Might a sovereign crisis still be waiting to happen? We have had 6 sovereign defaults already this year (Lebanon, Ecuador, Argentina (yes again), Zambia, Grenada and Venezuela). This does not include the 43 countries who have deferred payments under the Debt Service Suspension Initiative agreed by public sector borrowers in April this year.  

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Why it Pays to Pay Attention

Closely following market sentiment, especially negative market views – falling share prices, widening CDS spreads etc – can be very helpful in bringing latent issues about a company to our attention.  However, as the Wall Street Journal highlighted recently: “There is no substitute for fundamental research.”  

This was the opening sentence in the Journal’s coverage of Melinta Therapeutics, the New Jersey biopharmaceutical firm, whose shares lost two thirds of their market value the day after the company announced it was filing for bankruptcy on 2 January 2020.  

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How will we account for Covid?

This week in our training sessions people have been asking us our opinion on financial reporting in a post-covid era. At a very early stage in the pandemic, we saw companies reporting EBITDAC (Earnings before interest, tax, depreciation, amortisation and COVID), adding back profits they would have made in a ‘normal’ year – here’s an interesting article on EBITDAC from the FT.com (https://www.ft.com/content/5467518c-1b68-4712-9e74-e7cc949d8002)

Some businesses have grown during the crisis; before the pandemic, who could have predicted the accelerated rise of Zoom? 

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Whilst a quick search of Amazon and eBay reveals that although they are right out of crystal balls (along with surgical masks and hand sanitizer), we believe that as a result of regulatory and supervisory reforms over the last decade, the banking sector is relatively better placed to withstand the potential economic fallout of Covid19 than it was the financial crisis of 2007-12.

Starting with capital adequacy, the most fundamental measure of a bank’s ability to withstand stress,

Read more »

Welcome to the second edition of our regular briefing on news and views in the FIG (financial institution group) world.

These are the stories and insights that have captured our attention in recent months.

You can download a pdf version of the newsletter here.

Risk – Danske Bank Estonian Scandal

The forced closure of Danske Bank’s troubled Estonian operation displays the maximum impact of operational risk. Read article

Regulatory –

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The following article is from our latest FIG in Focus newsletter.

Impaired loans continue to fall at 2018 year-end whilst IFRS 9 expected loss provisioning has a mixed effect.

Bank impaired loans in almost all jurisdictions continued to fall in 2018, which considering the clouds on the macro-economic and political horizon may represent a cyclical low. Developed economies in particular, performed especially strongly with USA and Eurozone rates falling by 0.4% and 0.5% respectively.

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The following article is from our latest FIG in Focus newsletter.

In detailed guidelines designed to set out bail-in requirements for Eurozone banks, the Single Resolution Body (SRB) has recommended that large international banking groups adopt a so-called “Single point of entry” resolution strategy, similar to guidelines already in existence for UK banks since 2018.

A single point of entry resolution strategy typically relies upon the issue of resolution eligible liabilities at the group level,

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The following article is from our latest FIG in Focus newsletter.

In February 2019, Danske branch was ordered to close its Estonian operations by the end of the year as a result of the money-laundering crisis which has gripped the Danish bank.

The branch in question was acquired as a result of Danske’s merger with Finnish Sampobank in 2007. After the merger it continued to use a separate IT system from Danske’s main platform and many of its transactional documents were written only in Estonian and Russian.

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