On Sunday we got an email from a mid-level banking exec who answered a question we had about European banks and QE2 stemming from this (rather inflammatory) Zerohedge article which claimed that QE2 was basically a European bank bailout.
He responded by saying that the real issue for European banks isn’t running out of stimulus from QE2, but operating with increased capital ratios.
But he also said a lot more, about why lending isn’t happening, about why 12of the 20 primary brokers recognised by the Fed are foreign, and about how Quantitative Easing measures helped the economy (it reduced unemployment) whereas fiscal stimulus measures didn’t.
His opinion is essentially an opposition to everything said in the Zerohedge article, which claims that QE3 is an inevitability because European banks are in crisis.
Here’s what he wrote:
The 800-pound gorilla in the room for the European banks is increased capital ratios, which means legally required/mandated cash on the balance sheet.
The reason that many of the US-based banks have been unable to buy more of the risky assets is because of their direct exposure to US mortgages (i.e., Merrill Lynch (now BAC), Citigroup, to a lesser extent JPM), and because of the excessive regulatory burden being imposed upon them by Dodd-Frank, Volcker Rule, threatened OTC Derivatives margin requirements, and the millions of dollars of costs associated with additional onerous regulatory reporting requirements.
QE2 has been very successful and bringing about a 30% rally inequities along with persistently low rates, Treasuries continue to rally and will likely continue to do so, because with all of the holdings by the Fed, there are fewer bonds on offer in the marketplace.
The main reason why lending is not happening across the economy is due to: 1) uncertainty about future tax policy and future regulatory policy, 2) poor economic outlook with increased lending standards, which is perpetuating a long overdue deleveraging across the banking, corporate and retail sectors, and 3) slowing global economic growth beginning to be observed as a result of contractionary monetary and fiscal policy across most of the world’s major central banks (except, thankfully, the Fed).
The ECB rate hike in April, was a major mistake. [Jean-Claude] Trichet really hurt the peripherals and the major banks exposed to the PIIGS.
If it weren’t for Ben Bernanke and his QE & QE2, unemployment would be closer to 12% right now. The fiscal stimulus is what has proven to be very ineffective, as much of it was dispersed across programs with very little impact and sustainability.
The primary dealers qualify as primary dealers because of the assets that they hold in their US legal entities and their position in making markets in US treasury bonds. It is very beneficial for US taxpayers to have more global dealers in US Treasuries in order to improve the liquidity and demand for US debt. Many of the New York trading operations and NY-based investment banking arms employ as many if not more employees than the European-based operations.
Since financial markets continue to be truly global, we are quite happy that the Chinese have decided to reduce their $1.1 trillion of US Treasuries only slowly.
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