March 29, 2024

2 Central Banks Promise to Keep Rates Low

The bid to reassure investors brought the two central banks into closer alignment with the Federal Reserve, which, under Chairman Ben S. Bernanke, has become more open about its intentions.

At the same time, they appeared eager to signal that they would not follow the Fed in preparing for a gradual withdrawal of economic stimulus.

Mario Draghi, the president of the European Central Bank, based in Frankurt, said at a news conference that crucial interest rates would “remain at present or lower levels for an extended period of time.” Until Thursday, the bank had steadfastly refused to pin itself down on future policy.

“It’s not six months,” Mr. Draghi said. “It’s not 12 months. It’s an extended period of time.”

Mr. Draghi also said that the central bank was signaling a “downward bias” in interest rate policy, meaning further cuts were possible or even likely.

Only hours earlier, Mark J. Carney, who became governor of the Bank of England on Monday, made a similar break with tradition. The British central bank said in a statement that any expectations that interest rates would rise soon from their current record low level were misguided.

With their promises of easy money stretching toward the horizon, the central bankers offered more certainty to investors at a time when tensions in Europe are rising again. So-called forward guidance is considered one of the tools available to central banks, but it was one the European Central Bank and the Bank of England had not used before.

European markets reacted positively to the announcements, with the FTSE 100 in London closing 3.1 percent higher and the Euro Stoxx 50, a benchmark of euro zone blue chips, climbing 3 percent. (Markets in the United States were closed for the Fourth of July holiday.) The euro fell sharply, a development that was probably not unwelcome at the European Central Bank, since a cheaper euro makes European products less expensive in foreign markets, feeding exports. The British pound also fell.

Mr. Draghi said it was a coincidence that his central bank and Bank of England introduced forward guidance on the same day. Both left their main interest rates at 0.5 percent and did not announce any other policy moves. It was a day for talk rather than action.

“Mr. Draghi did what he does best today: intervene verbally to great effect,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in a note.

Mr. Draghi’s statement on Thursday came almost a year after he defused the euro zone debt crisis with a promise to do “whatever it takes” to preserve the currency union.

But after months of relative calm, Europe has been rattled in recent days by a political crisis in Portugal, which has raised questions about whether the region’s governments will be able to withstand popular discontent with their policies of cutting budgets to bring public debt under control. Investors have responded by pushing up the risk premium they demand on bonds issued by Italy, Spain and other troubled euro zone countries. Market rates on Italian and Spanish bonds retreated on Thursday after Mr. Draghi’s comments.

The commitment to keep rates low helps amplify the effect of rates that are already nearly rock bottom, by reassuring investors that they can count on easy money for the foreseeable future.

But some analysts saw Mr. Draghi’s statement as a bluff — a tacit admission that the central bank has run out of other ways to stimulate the euro zone economy.

“A change of a few words in the way he phrases the E.C.B.’s policy stance is an insufficient policy response to alter the — very troubled — course of the euroland economy,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said in an e-mail.

Jack Ewing reported from Frankfurt, and Julia Werdigier from London.

Article source: http://www.nytimes.com/2013/07/05/business/global/central-banks-of-europe-and-england-pledge-to-keep-rates-low-for-a-while.html?partner=rss&emc=rss

DealBook: Bank of England Official to Leave

Paul Tucker, deputy governor of the Bank of England.Neil Hall/ReutersPaul Tucker, deputy governor of the Bank of England.

LONDON – The Bank of England said Friday that Paul Tucker would resign as deputy governor. The announcement comes two weeks before Mark Carney takes over as the governor of the central bank.

Mr. Tucker, who has spent 33 years at the Bank of England, was also a candidate for the top job at the central bank. Mr. Tucker said that he planned to stay through the summer to help Mr. Carney, the former governor of the Bank of Canada, settle in to his new role.

“It has been an extraordinary honor to serve at the Bank of England over the past 30 years,” Mr. Tucker said in a statement. “I am very proud that, through the bank and the wider central banking community, I have been able to make a contribution to monetary and financial stability. I am looking forward to supporting Mark Carney as he arrives at the bank.”

Mr. Tucker had been a leading candidate to replace Mervyn A. King as governor of the Bank of England. But his chances dimmed after questions arose after an interest rate manipulation scandal erupted last summer.

British politicians accused Mr. Tucker and the central bank of failing to crack down on efforts by Barclays and other banks to manipulate the London interbank offered rate, or Libor, a benchmark for mortgages, corporate loans and other financial products worldwide. Mr. Tucker had to defend himself against assertions by former Barclays executives that the Bank of England had been aware of attempts to influence rates.

Mr. Tucker joined the Bank of England in 1980 after studying mathematics at Cambridge University. He became executive director for markets in 2002 and a member of the Bank of England’s rate setting committee. Earlier this year, he took a seat at the newly created Financial Policy Committee, which is part of Britain’s financial regulation system. At the central bank, he is known for improving communication with large financial organizations and keeping closer ties with chief risk officers.

“Paul has contributed immeasurably to a series of critical financial reforms, including policies to end too big to fail and to build more resilient derivative and funding markets,” said Mr. Carney, who is due to take the top job at the Bank of England on July 1. He added that he would like to continue a “close dialogue on how to build a more resilient financial system that more effectively serves the needs of the real economy.”

In a letter to Mr. Tucker published on the Bank of England’s Web site, George Osborne, the chancellor of the Exchequer, wrote that he was grateful to Mr. Tucker for his service and “a tremendous contribution to U.K. monetary and financial policy.”

“I have no doubt that you will continue to make a towering contribution to the international economic community,” Mr. Osborne wrote. “I hope that we stay in touch.”

Article source: http://dealbook.nytimes.com/2013/06/14/bank-of-england-official-to-leave/?partner=rss&emc=rss

DealBook: Pressure in Britain Over What to Do With Bailed-Out Banks

Justin Welby, the archbishop of Canterbury, urged a bank split.Pool photo by Jack HillJustin Welby, the archbishop of Canterbury, urged a bank split.

The archbishop of Canterbury, a former chancellor of the Exchequer and the outgoing governor of the Bank of England are unusual comrades in arms.

Yet, the three stalwarts of the British establishment — Justin Welby, Nigel Lawson and Mervyn King — are all calling for the breakup of the part-nationalized Royal Bank of Scotland.

They are part of a growing debate in Britain about what to do with the bank and its rival, the Lloyds Banking Group, which received more than $103 billion combined in rescue bailouts during the financial crisis.

Now, nearly five years after British taxpayers first took stakes in the lenders, the government is preparing to reduce its holdings before the next general election, which is expected in early 2015. The government owns 81 percent of R.B.S. and 39 percent of Lloyds.

Yet, unlike the share sales in financial giants like Citigroup that allowed the United States government to make a profit, the prospective offerings in Britain may be more difficult.

The two banks are still cleaning up their balance sheets and selling off unwanted assets that could put off new investors. Both continue to come under political pressure to increase potentially risky lending to the struggling British economy. And the timing of any share sale, which could come as early as next year, may lead to losses for British taxpayers — potentially angering voters.

“As we move closer to an election, the share prices of R.B.S. and Lloyds will become more scrutinized,” said Peter Hahn, a banking professor at the Cass Business School in London. “Whoever is in government, selling shares in these banks will be a top priority.”

Liz Morley, a representative for UKFI, the government agency that is in charge of managing the bank holdings, declined to comment for this article.

The British government’s quandary over the banks stands in contrast with the experience of the United States Treasury Department, which reduced the government’s stakes in the big banks more quickly.

Elisabeth Rudman, an analyst with the credit rating firm DBRS, said the two British banks were in much worse shape because of the financial crisis than their American counterparts. R.B.S. was not only burdened by its participation in the acquisition of the Dutch lender ABN Amro, but it had large exposure to imploding real estate markets like Ireland.

Nigel Lawson, left, the former chancellor of the Exchequer, and Mervyn King, the former Bank of England governor.Clive Brunskill/Getty Images and Issei Kato/ReutersNigel Lawson, left, the former chancellor of the Exchequer, and Mervyn King, the former Bank of England governor.

The critical element in the British government’s effort to shed its banks stakes is timing. Later this month, George Osborne, the current chancellor of the Exchequer, will present his strategy to return the two banks to the private sector. His plan will come soon after the findings of a British parliamentary committee in the middle of June that will outline how the firms could be privatized. Lawmakers remain divided over how the banks’ should be privatized, with many of the committee members calling for the breakup of R.B.S. to carve out the most risky assets.

Those in favor of a split say that freeing R.B.S. from its worst-performing assets would allow the bank to lend more, strengthen the banking system and help Britain’s economic recovery. Those against the breakup argue that it would cost both time and money that would be better spent letting the bank continue with its planned overhaul.

To connect banks with local communities could involve “recapitalizing at least one of our major banks and breaking it up into regional banks,” Archbishop Welby, a former oil executive who sits on the parliamentary committee, said in a speech on April 21.

For Mr. Osborne, planning the offerings will be precarious.

If the British government sells its stakes too soon, it could book a loss that might not sit well with voters. But if the government waits too long to sell, it could deter potential investors from buying the shares. It also may reverse the firms’ recent share price rise that have made the banks’ stocks some of the best performers in the FTSE 100-stock index over the last 12 months.

“I get confused by all the talk about waiting,” said Ian Gordon, a banking analyst with Investec in London, adding that the British government should sell the stakes tomorrow. “Can we sell the shares now? Of course we can.”

The fortunes of the two British banks have certainly improved since they received multibillion-dollar bailouts.

R.B.S. has been gradually digging itself out of its ill-judged ABN Amro acquisition in 2007. The bank, based in Edinburgh, has shed billions of dollars from its balance sheet and cut around 40,000 jobs over the last five years. The firm has also trimmed its investment banking operations, which came under scrutiny this year after R.B.S. was forced to pay a $612 million fine connected to a rate-rigging scandal.

Lloyds, which already is Britain’s largest mortgage lender, has refocused its efforts on the British retail banking sector. The bank’s chief executive, António Horta-Osório, announced a £1.5 billion net profit in the first quarter of 2013, compared with a £5 million loss in the same period last year.

Analysts say the rise in earnings is mostly driven by cost reductions, a fall in delinquent loans and fast-tracked asset sales like the disposal of a portfolio of real estate-backed securities in the United States for £3.3 billion last month to a number of American investors, including Goldman Sachs.

Market participants are now centering their attention on when the British government will start to reduce it stakes.

R.B.S.’s chairman, Philip Hampton, has said the bank would like the British government to start selling shares from the middle of next year, though the firm’s current share price is around 35 percent below what British taxpayers paid for their holding. Lloyds’ stock price is slightly above the government’s so-called break-even point, though bankers caution that any offering will be dependent on the health of the broader financial markets.

“Bringing too many shares to market could easily scare off investors,” said a prominent investment banker at a rival firm in London, who spoke on the condition of anonymity because he was not authorized to speak publicly. “When it comes to reducing the government’s stake, timing will be everything.”

Some leading voices in Britain are also calling for restraint.

Alistair Darling, the former chancellor of the Exchequer who led the bailouts of R.B.S. and Lloyds, said the government would make a mistake if it were to rush a sale of shares before the next election. Mr. Darling, a Labour politician who opposes the breakup of R.B.S., said the current government could wait at least another 18 months before selling off its stakes, but must clarify its plans to avoid creating confusion with potential investors.

“A clear statement is needed,” Mr. Darling said. “The longer this drags on, the worse this is going to get.”

For any prospective share sale in the two banks to be a success, the British government must convince voters that the offerings would benefit the economy after taxpayers spent billions of dollars to rescue the two lenders.

Just outside an R.B.S. branch in central London on Thursday, many seemed unconvinced that privatizing the bank would help to jump-start Britain’s recovery.

“I can’t see it making much difference,” said Sarah Mulligan, an I.T. consultant on her way to a meeting in London’s financial district. “Changing who owns the banks won’t necessarily get them lending again.”

A version of this article appeared in print on 06/07/2013, on page B7 of the NewYork edition with the headline: Pressure in Britain Over What to Do With Bailed-Out Banks.

Article source: http://dealbook.nytimes.com/2013/06/06/pressure-in-britain-over-what-to-do-with-bailed-out-banks/?partner=rss&emc=rss

DealBook: Lloyds and R.B.S. Detail Plans to Increase Capital Reserves

A Royal Bank of Scotland branch in London.Toby Melville/ReutersA Royal Bank of Scotland branch in London.

Two of Britain’s largest banks outlined plans on Wednesday to increase their capital reserves after local authorities demanded that the country’s biggest financial institutions raise a combined £25 billion ($38 billion).

The banks, Royal Bank of Scotland and the Lloyds Banking Group, both partly owned by British taxpayers after receiving multibillion-dollar bailouts during the financial crisis, said they would meet the requirement by retaining earnings and selling assets.

They said that they would not have to raise additional capital in the financial markets. Their announcements were made as banks across Europe, including Deutsche Bank and HSBC, acted to bolster capital reserves in line with new accounting standards known as Basel III.

European authorities are eager to protect the Continent’s financial institutions from instability caused by delinquent assets and exposure to risky trading and have outlined plans that require them to bolster their capital reserves.

On Wednesday, the International Monetary Fund said Britain should do more to fuel economic growth and be prepared to put more money into its bailed-out banks if necessary.

The I.M.F. said that some recent economic information from Britain was “encouraging” but that it did not point to a sustainable recovery soon. “Activity appears to be improving, but a slow recovery remains likely,” the fund said.

That view differs from comments by the departing governor of the Bank of England, Mervyn A. King, who said last week that there was “a welcome change in the economic outlook” and that a recovery was “in sight.”

George Osborne, left, the chancellor of the Exchequer, at a news conference Wednesday after meeting with the International Monetary Fund in London.Pool photo by Carl CourtGeorge Osborne, left, the chancellor of the Exchequer, at a news conference Wednesday after meeting with the International Monetary Fund in London.

The fund has criticized the austerity program developed by George Osborne, the chancellor of the Exchequer, saying that the British economy would recover faster if the government slowed its spending cuts and tax increases. The I.M.F. reiterated that opinion on Wednesday and called for additional public spending.

Neither Royal Bank of Scotland nor Lloyds disclosed the specific amount of capital that British regulators have demanded that they raise.

Analysts had expressed concern that the banks were two of the most vulnerable of Britain’s largest financial institutions, despite years of restructuring to shed so-called noncore assets and return to profitability.

After receiving bailouts in 2008, the banks have struggled to jettison legacy assets, including billions of dollars of underperforming loans, that have weighed on financial performance.

Royal Bank of Scotland, in which the British government holds an 81 percent stake, said on Wednesday that it would meet its increased capital needs by continuing to reduce its exposure to risky assets and shrinking its investment banking unit, while also selling more assets.

Since the financial crisis began, the bank has reduced its balance sheet by more than £600 billion of noncore assets and has eliminated more than 30,000 jobs.

The bank, which is based in Edinburgh, also said it would raise additional money through the initial public offering of a stake in its American division, the Citizens Financial Group, which is planned for 2015.

“R.B.S. remains committed to a prudent approach to capital,” the bank said in a statement.

Shares in Royal Bank of Scotland rose 2.2 percent in trading in London on Wednesday, while those of Lloyds rose 2.3 percent.

Lloyds, in which the government holds a 39 percent stake, also said it would meet its capital needs by shedding noncore assets and refocusing on its main retail business.

The bank, which is based in London, added that it planned to have a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial shocks, of 10 percent by the end of 2014, under accounting rules outlined European Union.

Lloyds has announced several divestments, including the £400 million sale of its stake in the wealth manager St. James’s Place, to raise capital.

The government may be preparing to start returning the banks to private ownership.

After years of lackluster financial performance by the two banks, their share prices have rebounded in the last 12 months as restructuring plans have taken root.

The chairman of Royal Bank of Scotland, Phillip Hampton, gave the latest indication of the bank’s return to private ownership this month after he said the government’s stake could start to be sold in the middle of 2014.

“It could be earlier, that’s a matter for the government,” he added at the time.

The Prudential Regulatory Authority, the regulator in charge of Britain’s largest banks, said on Wednesday that it was still in discussions with several institutions about their capital positions.

Recent attention has focused on the Co-operative Bank, a small British lender whose credit rating was recently downgraded to junk status because of its continued exposure to delinquent commercial real estate loans. The bank may have to raise up to £1 billion of additional capital, a recent report by Barclays analysts said.

“Banks are scraping around to raise funds to mitigate the impact of the capital requirements,” said Ian Gordon, a banking analyst at Investec in London. “The pressure has accelerated.”

Article source: http://dealbook.nytimes.com/2013/05/22/r-b-s-and-lloyds-plan-to-raise-capital/?partner=rss&emc=rss

Bank of England Offers Somber Assessment of British Economy

LONDON — The British economy might shrink again in the fourth quarter as troubles in the euro zone and rising prices take their toll on a fragile recovery, Mervyn A. King, the governor of the Bank of England, said Wednesday.

In a change from the optimism he had expressed lately, Mr. King struck a somber tone while presenting the central bank’s quarterly inflation report, saying growth would be “sluggish” in the near term and inflation would remain above the central bank’s target of 2 percent.

“The immediate economic outlook remains a challenging one,” Mr. King said. “We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while.”

Britain exited a double-dip recession in the third quarter as gross domestic product grew 1 percent in the three months through September. That was welcome, Mr. King said, but cannot be seen as a reliable indication of what to expect because growth in the quarter was helped by the 2012 Summer Olympic Games, which were held in London.

Mr. King acknowledged that the rate at which consumer prices rose recently had not slowed as much as the central bank had hoped, making recovery more difficult.

In fact, annual consumer price inflation moved even further away from the central bank’s 2 percent target in October, rising to 2.7 percent from 2.2 percent in September, in part because of higher university fees.

Higher prices together with pay freezes and tight bank lending have squeezed households, leading to lower spending. Companies are also cautious about hiring workers and increasing investment as long as economies on the European Continent, Britain’s biggest export market, continue to struggle. A rise in the value of the pound against the euro over the past month has added to Britain’s woes by making its exports more expensive on world markets.

Mr. King left open the option of more quantitative easing, the central bank stimulus program that includes buying bonds to inject more capital into the economy. He also hinted that the bank would not increase its benchmark interest rate, which is at a record low of 0.5 percent, any time soon because it would hurt the recovery.

Howard Archer, an economist at IHS Global Insight, said he expected the Bank of England to increase its asset purchasing plan by £50 billion, or $79 billion, to £425 billion in the first four months of next year and keep interest rates unchanged for at least another two years. The central bank last week decided to pause its asset purchases — a decision Mr. King attributed Wednesday to the outlook for inflation.

Mr. King refuted the reservations expressed by some policy makers and economists about the effectiveness of the central bank’s asset purchasing program at making funds available for lending. Paul Tucker and Charles Bean, two Bank of England deputy governors, have hinted in recent speeches that there are doubts about the impact of that type of stimulus on the economic recovery. Some economists suggest that Britain would be better served by policies that would directly improve bank lending.

Mr. King said the central bank committee had “not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”

“The road to recovery will be long and winding,” he said. “But there are good reasons to suppose that we are traveling in the right direction. The committee stands ready to do whatever it can to keep us on the right path.”

Article source: http://www.nytimes.com/2012/11/15/business/global/bank-of-england-offers-somber-assessment-of-uk-economy.html?partner=rss&emc=rss