Risk Of Online Accounts Seen As One of Largest Brokerages In World Temporarily Halts Online Trading After "Glitch"

- "Technical issue" at Fidelity blocks access to online accounts, stops online trading
- Fidelity is 3rd largest brokerage by client assets: $1.7 trillion at the end of 2016
- NatWest, RBS, Ulster Bank  have experienced online banking "issues" in November
- Clients left without access to funds & failed payments & little to no recourse
- Social media exposing the banks" and online trading platforms" shortcomings
- Reminder that online accounts can be rendered non-viable and vulnerability of absolute dependence and digital cash, digital gold etc

Editor: Mark O"Byrne

Yesterday, customers of Fidelity, the third largest brokerage in the world, found themselves unable to access their online accounts.

The company is responsible for an estimated 8% of total US wealth management. With such a huge responsibility, Fidelity,  like most companies, works hard to ensure clients have access to online accounts at all times.

Yet it still happened, reminding investors of the risks posed by digital assets - be they stocks, gold or indeed deposits - held solely through online accounts and platforms - the "Single point of failure".

Fidelity is just one of many online "outages" or "glitches" reported by financial institutions in the last year. In Europe, particularly the United Kingdom, banking customers have found themselves regularly facing bank account "glitches". It is thanks to social media that some of these even come to the fore, with many organisations keen to sweep them under the carpet.

Investors, savers and, in fact, any user of online services needs to be aware of the risks and how to protect themselves in the case of a sudden "access denied" message or worse, a prolonged period of not being able to access, trade and or withdraw funds from an online account.

Not like the old days...

Prior to online accounts it rarely occurred to users that they could suddenly be without access to funds, unable to make transactions or even receive their wages. Sadly, with the dawn of the internet and growing cyber security risks this is something no-one can afford to be without a plan-B for.

Outages can happen for a number of reasons, but many result in customers being unable to transact and being without funds.

In the case of Fidelity, it appears to have been an internal error, which also seems to be the common thread among many banking outages. However, cyber security is a major threat to any account that involves personal data and financial information.

Just this week Uber finally admitted exposing hackers to over 2.7 million customers" data, putting savings and futures at risk.

We must also consider what happened in Puerto Rico for a lesson in how vulnerable we are should natural disasters impede access to much needed personal funds for days and weeks.

Absolute reliance on online accounts and digital cash and digital gold is not prudent. When such accounts can be rendered non-viable in a matter of seconds, there is little recourse for the digital saver and investor should they not also own some tangible assets.

Social media prevents cover-up

Online account failures are becoming more common. We are increasingly aware of this thanks to social media. Whilst the majority of outages experienced in the West are resolved within a few hours (in the case of Fidelity it was hours) or days, customers are left feeling nervous and frustrated and in some cases they experience real repercussions. Rents are not paid, important direct debits fail and charges are incurred.

This last month Lloyds and Halifax Bank of Scotland experienced major issues with accounts. Some account holders not only found transactions weren"t processed but also logged in to be told they no longer had an account with their bank.

Many customers in the recent Natwest outage were particularly frustrated at the bank"s lack of communication and failure to alert account holders to the problem.

“Not just an online problem, my bank card is not working now as well for online payments! People have bills to pay, how much longer?”

“You were acknowledging this problem over an hour ago but only to those that tweeted you directly. Why has it taken so long for a public tweet?”

Also this week Nationwide customers found themselves embarrassed when their funded accounts suggested they had no money:

Banking outages are becoming so common that we no longer hear reports in the mainstream media of them. Users report to feeling "embarrassed" but the reality and severity of the situation and can have far-reaching complications.

One would have thought that banks would have learnt from the 2012 disaster that was seen in the summer of 2012 for customers of RBS, NatWest and Ulster Bank. Users found they could not access funds for a week or more as account balances had to be manually updated. RBS was fined £56m for the inconvenience and risk placed on account holders.

Complacency amongst bank and online account users

I don"t think I am aware of a single person who has not experienced problems with bank or financial account services. Whether access to, payment issues or information failure everyone I know has come up against such issues in the past.

Concern regarding the risks to online customers is so high that the European Banking Authority this week mentioned the growing reliance on online digital platforms as a major risk to customers.

What do the majority of people do? Get a bit annoyed then shrug their shoulders and make some comment about "banks today". The same goes for the likes of Fidelity, Uber and TalkTalk, non-banks who have also exposed their customers with little to no recourse for the end user.

The lethargy regarding customers" switching banks is astonishing when one considers the problems that have been caused in recent years. This is for two reasons, the first is because there is little knowledge of the alternatives out there and secondly, because there is a belief that this is just what you have to put up with these days.

This is a sad state of affairs. Those who earn and save money have every right to be able to access their funds at all times, for whatever purpose. It is tragic that the digital, online economy has made many feel otherwise. For something that was heralded as giving customers so many more options, it is instead making many feel trapped and without options.

Cyber-attacks, natural disasters and technical errors are all very good reasons for those who wish to hold money and data with an organisation to seek out ways to diversify their investments. This is not just in terms of spreading the risks between digital accounts, but also away from solely digital assets.

Non digital gold cannot be exposed to "glitches" 

Gold and silver often get a bad rap when it comes to discussions about their role as money. Both are pushed to the bottom of the pile when you consider the convenience of spending on a card, paying out wages or making quick gains when trading stocks and shares.

But one thing that is guaranteed with physical, allocated and segregated gold and coins and bars for delivery as offered by GoldCore, is that you know you will always have access and liquidity due to outright legal ownership of bullion. Either with bullion in your possession or with direct ownership in some of the safest vaults in the world. That is not the case with fiat electrons bank accounts or online trading accounts, whether in times of crisis or technical outages.

In addition many such platforms force you to only buy and sell through their online account and their online platform and website. Such digital platforms are “closed loop systems” where liquidity and pricing are dependent on a single platform, website and large corporation. A buyer can only buy and sell through that one online platform. An investor is in effect “captive” and massively dependent on that one counter party and a single point of failure.

No matter the town, city or country you find yourself in, times such as these pose multiple threats whether military, natural or just digital.

Today we still assume banks, companies and governments are competent and will look after our accounts. We cannot bring ourselves to imagine electricity systems and our banking systems including ATMs going down and not having access to our hard earned savings. This is despite it clearly happening increasingly frequently.

News and Commentary

Gold volatility "breakout" coming soon to ‘eerily quiet’ market - Metals Expert (CNBC.com)

Gold inches up as dollar weakens after U.S. Senate tax bill stalls (Reuters)

Dollar Dips as Tax Bill Hits Snag; Stocks Decline: Markets Wrap (Bloomberg.com)

U.S. Mint American Eagle gold, silver coin sales fall sharply (Reuters)

Turkish gold trader implicates Erdogan in Iran money laundering (Reuters)

Source: City AM

"There will be pain": Bank of England"s Carney warns against no deal Brexit (City AM)

Chance of US stock market correction now at 70 percent: Vanguard Group (CNBC)

4 habits that will make you poor (SBCH)

How central banks paved the way for bitcoin’s birth (MoneyWeek)

Sharia-compliant gold standard - Response from Muslim investors has been positive (The National )

Gold Prices (LBMA AM)

01 Dec: USD 1,277.25, GBP 946.57 & EUR 1,072.51 per ounce
30 Nov: USD 1,282.15, GBP 952.64 & EUR 1,084.06 per ounce
29 Nov: USD 1,294.85, GBP 965.70 & EUR 1,092.46 per ounce
28 Nov: USD 1,293.90, GBP 972.75 & EUR 1,088.95 per ounce
27 Nov: USD 1,294.70, GBP 969.73 & EUR 1,084.83 per ounce
24 Nov: USD 1,289.15, GBP 967.89 & EUR 1,086.37 per ounce
23 Nov: USD 1,290.15, GBP 969.93 & EUR 1,089.40 per ounce

Silver Prices (LBMA)

01 Dec: USD 16.42, GBP 12.16 & EUR 13.80 per ounce
30 Nov: USD 16.57, GBP 12.32 & EUR 14.00 per ounce
29 Nov: USD 16.90, GBP 12.60 & EUR 14.26 per ounce
28 Nov: USD 17.07, GBP 12.84 & EUR 14.36 per ounce
27 Nov: USD 17.10, GBP 12.81 & EUR 14.32 per ounce
24 Nov: USD 17.05, GBP 12.80 & EUR 14.38 per ounce
23 Nov: USD 17.10, GBP 12.84 & EUR 14.43 per ounce

Recent Market Updates

- Low Cost Gold In The Age Of QE, AI, Trump and War
- Own Gold Bullion To “Support National Security” – Russian Central Bank
- Bitcoin $10,000 – Huge Volatility of Cryptocurrencies and Risky Fiat Making Gold Attractive
- Financial Advice from Dr Wayne Dyer
- Buy Gold As Fed Shows Uncertainty And Concern Over Financial ‘Imbalances’
- Brexit Budget – Grim Outlook As UK Economy Downgraded
- Geopolitical Risk Highest “In Four Decades” – Gold Demand in Germany and Globally to Remain Robust
- Gold Versus Bitcoin: The Pro-Gold Argument Takes Shape
- Money and Markets Infographic Shows Silver Most Undervalued Asset
- Is New Fed Chief A “Swamp Critter Extraordinaire”?
- Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe
- UK Debt Crisis Is Here – Consumer Spending, Employment and Sterling Fall While Inflation Takes Off
- Protect Your Savings With Gold: ECB Propose End To Deposit Protection

Related Reading

Puerto Rico Without Electricity, Wifi, ATMs Shows Importance of Cash, Gold and Silver

Massive Equifax Hack Shows Cyber Risk to Deposits and Investments Today

Internet Shutdowns Show Risk of Digital Gold Platforms

Yahoo Hacking Highlights Cyber Risk and Increasing Importance of Physical Gold

Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.

UK Banks Too Scared Of Regulator To Open Accounts For Crypto Companies

Want to set up a company to trade cryptocurrencies in the City of London. Forget about it.

Lloyd Blankfein tweeted about spending more time in Frankfurt, now London is shunning the fastest growing sector in finance. From the FT

British banks are shunning companies that handle cryptocurrencies, forcing many to open accounts in Gibraltar, Poland and Bulgaria and prompting some to question the UK’s ambitions to be a global hub for the fast-growing fintech sector.

 

Investor interest in bitcoin and other cryptocurrencies has surged since their prices rocketed this year, but traditional banks are steering clear of the sector, fearing it is riddled with criminals and fraudsters. ‘Nobody will give us a bank account in the UK,’ said James Godfrey, head of capital markets at BlockEx, a platform for trading digital assets including cryptocurrencies. He said Metro Bank recently shut its UK account, forcing it to rely on a Bulgarian lender to keep trading. Mr Godfrey said the disruption had prompted BlockEx to consider moving to a more welcoming location, such as Toronto.

 

‘Having [Bank of England governor] Mark Carney standing at the front of the shop and saying ‘raa, raa, fintech’ just doesn’t do it for me.’ Metro Bank declined to comment. Michael Hudson, chief executive of the bitcoin investment firm Bitstocks, said:

 

“It is almost an impossibility to get a UK bank account. We bank in Gibraltar and Poland — the two jurisdictions that are most stable. We had an account in Bulgaria but that didn’t last long.

The fears on the part of banks relate to potential problems with the regulator as the report outlines.

“The market value of all cryptocurrencies has soared from under $30bn six months ago to more than $160bn. However, banks are keeping their distance, worried by the fact that cryptocurrencies are commonly used by criminals to trade illicit goods on the ‘dark web’. A few countries, including Japan and Gibraltar, have created rules for cryptocurrencies, but they remain unregulated in many parts of the world, including much of Europe. ‘When you look on the dark web, everything there is being paid for with cryptocurrencies,’ said one UK bank boss. ‘You don’t know who is transferring money in and out. If cryptocurrency goes to Iran and we’re involved then I get shut down.”

Banks are too scared of the regulator to open accounts for crypto trading businesses. Meanwhile, the regulator is unhappy with the banks for not opening accounts, according to the FT “The Financial Conduct Authority is worried that banks’ reluctance to open accounts for some fintechs is hurting competition after it hampered several start-ups entering its sandbox to test their business models under its supervision. ‘We are concerned that denying certain customers bank accounts on a wholesale basis causes significant barriers to entry and could lead to poor competition in certain markets,’ the regulator said.”

The double-edged sword in today’s world of excessive regulation.

Maybe the Financial Conduct Authority could adopt the common-sense approach, sit down with the banks and work something out. Nah, probably won’t happen. In the meantime, don’t mention the war crypto…

“Iqbal Gandham, UK head of eToro, a social trading firm that has handled more than $1bn of cryptocurrency trades for clients since adding the asset class to its platform this year, said: ‘The moment you mention crypto to a bank, it’s like you are a drug dealer.’

Changing bank accounts and relying on foreign lenders is disruptive and undermines the confidence of clients, said Mr Hudson at Bitstocks.

‘It makes life very difficult, just simple things like paying staff,’ he said. One British banker said opening an account in Gibraltar or Poland would cost start-up firms ‘an arm and a leg’.

UK Finance, which represents British banks, said: ‘No regulatory regime is yet in place for virtual currencies. Firms’ own risk appetites will determine to what extent they engage with any firms engaged in virtual currencies.

The European Banking Authority is yet to update guidance it published more than three years ago, advising national regulators to ‘discourage credit institutions, payment institutions and e-money institutions from buying, holding or selling virtual currencies’. Obi Nwosu, chief executive of bitcoin exchange Coinfloor, said: ‘There are British banks interested in doing this, but they don’t want to rush into it.’ His company, which says it handles a majority of UK cryptocurrency trading, is in ‘constant conversation’ with British banks about opening an account. Barclays is one of the few British lenders to have a handful of clients in the cryptocurrency sector. HSBC is talking to a few potential clients in the sector despite its 2011 ban on doing business with the money services sector because of anti-money laundering concerns.

HSBC said it was ‘monitoring the development of virtual and digital currencies such as bitcoin as well as regulations governing their use’, adding that it has ‘very limited appetite to bank issuers or dealers in virtual currencies.

By the time it does, the proverbial horse will have bolted.

EU Taxpayers Brace As Deepening Banking Crisis Means Euro-TARP Looms

Authored by Don Quijones via WolfStreet.com, 

If the ECB scales back stimulus, banks face even greater risk of collapse. But now there’s a new solution

Events are moving so fast in Europe these days, it’s almost impossible to keep up. While much of the attention is being hogged by political developments, including the election in the Netherlands, Reuters published a report warning that the European banking sector may face even higher bad loan risks if the ECB begins to scale back its monetary stimulus programs, something it has already begun, albeit extremely tentatively.

The total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.

On a country-by-country basis, things look even scarier. Currently 10 (out of 28) EU countries have an NPL ratio above 10% (orders of magnitude higher than what is generally considered safe). And among Eurozone countries, where the ECB’s monetary policies have direct impact, there are these NPL stalwarts:

• Ireland: 15.8%


• Italy: 16.6%


• Portugal: 19.2%


• Slovenia: 19.7%


• Greece: 46.6%


• Cyprus: 49%

That bears repeating: in Greece and Cyprus, two of the Eurozone’s most bailed out economies, virtually half of all the bank loans are toxic.

Then there’s Italy, whose €350 billion of NPLs account for roughly a third of Europe’s entire bad debt stock. Italy’s government and financial sector have spent the last year and a half failing spectacularly to come up with a solution to the problem. The two “bad bank” funds they created to help clean up the banks’ toxic balance sheets, Atlante I and Atlante II, are the financial equivalent of bringing a butter knife to a machete fight. So underfunded are they, they even strugggled to hold aloft smaller, regional Italian banks like Veneto Banca and Popolare di Vicenza, which are now pleading for a bailout from Rome, which in turn is pleading for clemency from Brussels.

What little funds Atlante I and Atlante II have left are hemorrhaging value as the “assets” they’ve been used to buy up, invariably at prices that were way too high (often at over 40 cents on the euro), continue to deteriorate. The recent decision of Italy’s two biggest banks, Unicredit and Intesa Sao Paolo, to significantly write down their investment in Atlante is almost certain to discourage the private sector from pumping fresh funds into bailing out weaker banks.

Which means someone else must step in, and soon. And that someone is almost certain to be the European taxpayer.

In February ECB Vice President Vitor Constancio called for the creation of a whole new class of government-backed “bad banks” to help buy some of the €1 trillion of bad loans putrefying on bank balance sheets. Constancio’s idea bore a striking resemblance to a formal proposal put forward by the European Banking Authority (EBA) for the creation of a massive EU-wide bad bank that, in the words of EBA president Andrea Enria, would “make it much easier to achieve critical mass and to create a well functioning market for (impaired) assets.”

Here’s how it would work, according to Enria (emphasis added):

The banks would sell their non-performing loans to the asset management company at a price reflecting the real economic value of the loans, which is likely to be below the book value, but above the market price currently prevailing in illiquid markets. So the banks will likely have to take additional losses.

The asset manager would then have three years to sell those assets to private investors. There would be a guarantee from the member state of each bank transferring assets to the asset management company, underpinned by warrants on each bank’s equity. This would protect the asset management company from future losses if the final sale price is below the initial transfer price.

One of the biggest advantages of launching an EU-wide bad bank is that it would avoid the sort of public “resistance” that would occur if it was done at a national level, says Enria. Italian lenders would presumably be able to continuing pricing bad loans at or around 40 cents on the euro on average, even though their real value — i.e. the current value priced by the market — is often much lower. The difference between the market price, if any, and the price the banks end up receiving for their bad debt will be covered by Europe’s taxpayers.

If given the green light, the scheme would pave the way to the biggest one-off bail out of European banks in history. It would be Euro-TARP on angel dust, with even fewer checks and balances and much less likelihood of ever recovering taxpayer funds. According to a banker source cited by Reuters, while Germany has not yet endorsed the EBA plan, the EU documents describe the development of a secondary market for NPLs as a priority. According to Enria, the EBA hopes to finalize matters “at the European level” in the Spring.

The documents also include proposals for a wider “restructuring of banking sectors” as states address the NPLs problem. This “could lead to mergers among EU banks after they offload their bad loans,” a banking industry official said.

In other words, EU taxpayers would have to spend potentially hundreds of billions of euros saving yet more banks from the consequences of their own acts and bail out their bondholders and potentially their stockholders too, with funds desperately needed in other areas. Those banks, once saved and their balance sheets cleansed, would then be handed on a platter to much bigger banks. In return, taxpayers would end up with an even more concentrated, consolidated, interconnected financial system that is even more prone to abuse, corruption, and excess.

The ECB’s policy isn’t about creating inflation but about keeping a financial system and a currency union from collapsing upon each other. Read…  ECB Trapped in its Own “Doom Loop” as Inflation Surges

Biggest EU Banks Embark On The Mother Of All Debt Binges

Submitted by Don Quijones via WolfStreet.com,

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware...

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

Put simply, if a bank is resolved, holders of these instruments could lose much or all of their money, similar to stock holders. According to Olivier Irisson, executive chief financial officer at Groupe BPCE, France’s second largest bank, it’s a “very good compromise for investors and banks.”

Judging by how they’re selling, yield-starved investors seem to agree. After the new bonds were rubber stamped by the Banque de France in mid-December, investors gobbled up €1.5 billion of Credit Agricole’s senior non-preferred 10-year bonds despite only receiving about 45 basis points more than they would get on traditional senior debt and about 65 basis points less than on subordinated.

Voracious Appetite

Société Générale quickly followed CA’s lead, issuing €3.5 billion of 5-year dollar-denominated notes. Investors lapped it up. During the same week BNP Paribas sold €1 billion of bail-in-able debt, a mere drop in the ocean compared to the €30 billion of senior non-preferred debt it hopes to raise by 2019. BPCE issued its first non-preferred deal in the second week of the year, a €1 billion six-year trade that attracted $2.4 billion of orders. It then launched an even riskier samurai (yen denominated) non-preferred trade, and most investors were not put off by the A- rating.

“2017 will be the year of senior non-preferred,” said Vincent Hoarau, head of financial institutions syndicate at Crédit Agricole. Europe’s biggest banks certainly have a voracious appetite for new funds. The European Banking Authority recently estimated a €310 billion gap in all the region’s banks meeting their total loss absorbing capital requirements before the 2019 deadline. And much of that gap is expected to be filled by senior non-preferred bonds.

The European Commission has already endorsed the financial instrument, rating agencies have also lent their approval and the ECB can’t wait to come up with “a common framework at Union level“. However, the legislation permitting its issuance is currently only in place in France and is not expected to be passed elsewhere in Europe before the second half of 2017, at the earliest.

But certain banks have already jumped the gun, including Holland’s ING and Spain’s Santander, both of which have begun issuing senior non-preferred bonds despite the fact their issuance has not been officially sanctioned by each bank’s respective national regulator. Even more ominous, Italy’s fragile superbank, Unicredit, has also expressed an interest, though it will probably have to wait for Italy’s banking crisis, of which it has a major part, to blow over (assuming it can) before joining the party.

A Staggering Volume of Debt

Even by today’s inflated standards, the volume of debt the G-SIBs hope to issue in the next two years is staggering. Santander alone intends to issue between €43 billion and €57 billion, in order to meet the capital requirements that are scheduled to come into effect for the world’s 30 biggest banks on Jan 1, 2019. That’s between 60% and 75% of Santander’s entire market cap. And if everything goes according to plan, most of that debt — between €28 billion and €35.5 billion worth — will be issued in the form of senior non-preferred bonds.

For the moment there’s little concern over investor appetite, says Demetrio Salorio, global head of debt capital markets at Société Générale Corporate & Investment Banking. “The investor base is keen,” he says. “They are far more at ease with the instrument than they were 18 months ago.” Spreads could even tighten, he reckons.

All of which is testament to just how desperately starved of yield institutional investors have become in the NIRP environment as they’re trying to get their hands on financial instruments that offer virtually no security in exchange for the slimmest of additional returns.

But the investor pain, when it’s time for it, should relieve taxpayers and the public. When the bank collapses and is being resolved or recapitalized, these bondholders are supposed to get bailed in and lose some or all of their investment. This would protect taxpayers at least to some extent from getting shanghaied into doing that job. And if institutional investors who take that risk don’t get paid enough for taking that risk, so be it. It’s just pension funds and retirement nest eggs under their management that will take the hit.

Unless, of course, the government, under political pressure, decides to bail out those bondholders anyway with taxpayer money, as they’re doing in Italy’s banking crisis at the moment, on the pretext that these bondholders were naive retail investors who were missold a similar version of bail-in-able junior bonds. And so it would be back to square one.

In Italy, the insider blame game has begun. Read…  Italy’s Banking Crisis Is Even Worse Than We Thought

World's Largest Actively Managed-Bond Fund Dumps "Excessively Risky" Eurozone Bank Debt

Back in September, Tad Rivelle, Chief Investment Officer for fixed income at LA-based TCW, said in a note that "the time has come to leave the dance floor", noting that "corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle." Ominously, he added that “we’ve lived this story before.” Five months later, the FT reports that TCW, which is also the US asset manager that runs the world’s largest actively managed bond fund, has put its money where its bearish mouth is, and has eliminated its exposure to eurozone bank debt over fears these lenders are "excessively risky."

In an interview with the FT, Rivelle said the company began to reduce its exposure to debt issued by eurozone lenders following the UK’s vote to leave the EU last June. In the first half of last year TCW, which oversees $160bn in fixed income strategies, had around $2bn invested in European bank debt. This has fallen to less than $500m since the Brexit vote, most of it in UK banks.

Rivelle, who previously was a bond fund manager at PIMCO, said his biggest concern was the number of toxic loans held by eurozone lenders, which amount to more than €1 trilion. Last month Andrea Enria, chairman of the European Banking Authority, said the scale of the region’s bad-debt problem had become “urgent and actionable”, and called for the creation of a “bad bank” to help lenders deal with the issue. Rivelle said: “The [eurozone] banking system [has] a bad combination of negative rates, slow growth and lots of problem non-performing loans. It is inherently prone to a potential crisis should global economic conditions, or European economic conditions, worsen. [These are] the preconditions of a potential banking crisis.”

Continuing his bearish bent, Rivelle added that there is a 50% likelihood of another global recession within the next two years, removing any incentive to invest in the eurozone banking sector within that timeframe. The forthcoming French presidential elections in April, which could see Eurosceptic candidate Marine Le Pen come to power, and the problems facing the Italian banking system, are additional risks for eurozone banks this year.

“[The likelihood of another recession] is an unbearable level of risk for European banks, given they were not recapitalised [following the last financial crisis]. They are over-levered, and you are not well paid to underwrite the risks. We view continental European banks as being excessively risky.”

As the FT adds, other asset managers have acknowledged that political risks in Europe this year, including the French elections and German elections in September, could intensify pressure on eurozone banks. PIMCO owner Allianz has conveniently created the following graphic summarizing just that.

Some other opinions:

Iain Stealey, fixed income portfolio manager at JPMorgan Asset Management, the US investment house that oversees $1.8 trillion in assets, said: “The main [concern] in the eurozone is political risk. We’ve got the French elections in April and May, and the German elections [in September]. At the moment, the market is a little bit risky. [The French elections] could be a risk to eurozone bank debt.”

Amundi, Europe’s largest listed fund house, is considering reducing its exposure to French banks ahead of the presidential election, according to Hervé Boiral, head of European credit at the asset manager.

However, several asset managers highlighted reasons for optimism about Europe’s banking sector, including the likelihood that the European Central Bank will begin to scale back its bond-buying programme at the end of 2017, and potentially raise interest rates next year. The central bank’s record-low interest rate policy has hurt banks’ profitability as they have earned less money against customers’ deposits.

Mr Stealey, whose $2.7bn global bond fund has 5 per cent of its assets invested in European financials, said: “We have been in and out [of eurozone bank debt] over the past year, but at the moment we are looking at it as an opportunity. Overall the European economy is picking up.”

While concern about European exposure ahead of a flurry of political event risks is understandable, it is not quite clear where the capital will be allocated to instead, especially now that Trump"s honeymoon with capital markets is souring (see Dalio, Goldman), and it is possible that the US will become the next source of capital flight at least until such time as much more clarity on Trump"s policy implmentation is available.

These Are The 3 Main Issues For Europe In 2017

Submitted by George Shapiro and Jacob Shapiro via MauldinEconomics.com,

What will the year ahead look like for Europe? 2017 will be another chapter in the European Union’s slow unraveling… a process that has been underway for over a decade.

The EU is a union in name only. The transfer of sovereignty to Brussels was never total, and member states are independent countries… each with their own interests at stake.

Here are the major forces at work.

1. The Italian Crisis

Italy’s banking crisis has played a key role in the destabilization of its domestic politics. The main problem is the Italian banking sector’s high rate of non-performing loans (NPLs). Approximately 17% of all loans from Italian banks are NPLs, according to the European Banking Authority. The bank currently making headlines, Banca Monte dei Paschi di Siena, had 45 billion euros ($47.4 billion) worth of NPLs and other doubtful loans when its problems came to light in 2016.

But the issue here is not simply money. The balance sheets of Italian banks don’t exist in a vacuum. If the European Central Bank were to bail out Italy, it would mean, in effect, that all of Europe would be paying for the bailout.

Greece, which had austerity forced upon it, would cry foul. The German public would object, and Chancellor Angela Merkel’s position would be severely weakened.

2. Declining German Exports

The major economic issue we expect to see in 2017 is a decline in German exports. The latest World Bank data shows that Germany’s exports-to-GDP ratio is 46.8%.

Neither China nor Russia will be increasing demand for German goods due to their own economic woes. And while Germany has managed to survive thus far by increasing exports to the UK and the US, this is not sustainable. This affects not just Germany, but all of Europe.

The EU is built around a massive exporter: Germany. That makes the EU vulnerable to drops in demand for German exports. It also creates a particular kind of political relationship between Germany and the rest of the EU. This is especially true for countries that are markets for German goods and those that are in the German supply chain.

This dependency and economic architecture has worked in the past. But now, it faces two key challenges. The first is how to increase demand for the products in question (which is not in any single country’s control). The second is that many of Europe’s economies are still struggling due to the 2008 financial crisis.

The EU’s growing socio-economic problems, in turn, are leading to increased nationalism. We saw this manifest in Brexit in 2016. In 2017, this dynamic already is affecting elections in France and Germany. The conversation has shifted from an internationalist position to a nationalist one—even for those who historically have been most committed to the EU (like Merkel).

3. The Security Question

Security will be an issue for the EU… and here, too, member states’ interests diverge. Some countries are more concerned with refugees than others, and Brussels is still unable to present a universally accepted plan for dealing with the refugee crisis.

There is also the question of Eastern Europe. It wants its security prioritized as it faces an increasingly aggressive Russia. Western Europe is less concerned with Russia on a daily basis and more concerned about Islamic terrorism.

Meanwhile, a Trump presidency is about to shine a very bright light on the future of NATO. This will mean hard choices for many European countries.

The security issues are not as serious as the economic and political issues for Europe right now. But they loom in the background and feed the strain on the EU rather than unite member states in common cause.

The Weakening of the EU

When we look at Europe today, we see less of a move toward EU dissolution than the gradual ignoring of EU directives. At the beginning of last year, George wrote the following, and it remains the general frame through which we view events in Europe:

The EU will survive, and one day you will be able to visit a dusty office in Brussels, much like the European Free Trade Association’s offices in Switzerland, where it still exists. [The EFTA was a British-led alternative to the European Community in the late 1950s and ’60s that is irrelevant today despite the continued existence of its offices.] I am sure the staff will be doing something, writing directives that no one will follow, or even care to object to. I once expected ‘Götterdämmerung,’ the ‘Twilight of the Gods,’ to move the EU. Today I became convinced, not that the EU couldn’t continue this way, but that it really isn’t continuing in any significant way.

Italian banks, German exports, nationalism affecting domestic elections, and divergences on security issues will be the main issues in 2017. But these are really just small parts of a much larger forecast that is slowly hulking toward fruition.

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