As we’ve discussed repeatedly, bank stress tests have been a confidence building exercise, an effort to talk bank CDS spreads down and bank stock prices up. That was clearly the intent of the first effort by the US Treasury in 2009 and it succeeded so well as a PR exercise that the Eurozone copied it last year, incredibly finding that obviously undercapitalized Eurobanks needed a mere €3.5 billion euros more in equity. Mere months after the release of the results, lenders were being much more stringent and shunning banks who had been given an official clean bill of health.
This pattern has continued. Earlier this year, the EBA said the Eurobanks needed €80 billion in additional capital. We hooted:
Things have gotten so ludicrous that you can now read contradictory stories in the Financial Times mere days apart (I’m not criticizing the FT but the apparatus that does the messaging). The day before yesterday, Eurozone banks “threatened” that they’d have to be nationalized if the haircuts on the aforementioned Greek funding deal were increased from 21% to 50%. Note credible estimates as early last year put the level of writedowns needed on Greek debt at a minimum of 50% (75% was not an uncommon number) and Greece has undershot forecasts repeatedly since then.
The idea that nationalization is a horrible outcome to anyone other than bankers shows how far down the rabbit hole we’ve gone. But aside form that, recognize the implication: increasing the haircuts from 21% to 50% on Greek debt would tank banks. Even if we use the total amount of Greek debt outstanding, €350 x .29, we get €102 billion. But that figure is high, since what is relevant is the debt held by banks, not the total. A FT Alphaville story reported the private debt target for participation in the earlier restructuring plan (the goal was 90% participation) was €135 billion. Gross that up and you get €150 billion, and take 29% of that, and you get €44 billion.
If a mere incremental €44 billion loss across Eurobanks is such a devastating event, the banks are pretty wobbly as it is. Mind you, we all know that, but the banks have just said that, loudly and publicly. And pretty much no one expects the resturcturings to stop with Greece.
Yet today, the FT tells us that European officials thinks the level of recapitalization needed is a mere €80 billion. Earth to base, if they are so fragile that €44 billion in losses will allegedly put a lot over the edge, they need a lot more dough than that. The prevailing estimates of the magnitude of the combined banking/sovereign is in the €2 to €3 trillion range. This measure is not a solution, and it falls so far short that it’s an embarrassing and dangerous admission that the European financial leadership isn’t merely politically constrained, it’s utterly clueless. At best, the authorities must view this action as tantamount to administering a shot of adrenaline to the heart of a failing patient.
A week after this post ran, the EBA increased the amount banks needed to raise to €106 billion.
In a further embarrassment, the EBA today, a mere six weeks after their October assessment, announced stress test results that found that Eurobanks now need €115 billion in additional capital. It appears to be difficult to pretend that banks have big enough risk buffers when interbank funding has dried up and central banks are going through all sorts of hoops to provide emergency support.
The problem is, just as the rating agencies generally issue downgrades only after the markets have given a big thumbs down on current ratings, so too have the Eurostress tests been shown to be useless as anything other than a measure of the regulators’ degree of denial. And even with this overdue recognition that the Eurobanks need more equity, pray tell where are they gonna get it? Sovereign wealth funds have been cool on bank equity since they were burned in 2007 when they were asked to be the fillup of near last resort. Bank stock prices are sufficiently low that banks will be loath to issue shares even under duress (and will the investors even take up shares on the scale needed? When I was a kid, you could do tech IPOs only two or three years out of five, the market simply was not there otherwise. There may not be a price at which, say, Unicredit could sell €8 billion worth of shares in the next two or three months). Consider this quote from two weeks ago:
Uninvestable is just about the worst word in a shareholders’ vocabulary.
The term – meaning that the market sees no point at all in investing in a certain asset – is being used increasingly when talking about European banks.“It is an absolute disaster zone. I wouldn’t touch them. You couldn’t make me buy a bank,” says Paul Casson, director of pan-European equities at Henderson Global Equities.
Even some bank chief executives seem to agree. “I’d be very interested to see the investor who is prepared to put more capital towards UK banks. All of them are thinking that’s a dumb place to put capital,” Stephen Hester, chief executive of RBS, the part-nationalised UK lender, said this week.
The big banks have threatened to shrink their balance sheets to reach target equity levels, but that seems questionable in the current environment. Who exactly is gonna buy their riskier assets now (unloading riskier assets would have the biggest effect on reducing capital needs)? Even if there was some appetite among institutional investors for this trade, there isn’t enough in aggregate. And the bigger constraint is the banks would have to sell those assets for no lower than the price at which they are carried on their balance sheets now. Selling assets at a loss would reduce their equity levels, defeating the purpose. (Note they could still let existing loans roll off and then not extend new credit in the same volume, but that is a much slower route for reducing balance sheet size).
The EBA also set its targets for particular institutions in specific amounts, rather than percentage levels, so the regulator may also have decided to change posture to block the banks’ largely empty threat to shrink to meet target capital levels.
All in all, this is predictably too little, too late. The biggest news in this release is the willingness to admit that German banks might be wobbly. Ahem, anyone with the faintest acquaintance with the financial news understood that the “rescue the periphery countries” exercise was really to save French and German banks. So how could any remotely adequate stress test NOT find German banks coming up short?
From the Financial Times:
Germany’s banking system was shown to be far weaker than previously thought in a new round of European stress tests, raising the prospect of further taxpayer bail-outs….
Some analysts had expected the overall capital deficit to fall from the €106bn October figure, as banks have hoarded profits, begun converting some debt to equity-like instruments and “deleveraged” – selling asset portfolios and shrinking lending.
From Bloomberg:
The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA (SAN) and 7.97 billion euros for Italy’s UniCredit SpA. (UCG)…
“It looks as if the banks are running just to stand still,” said Matthew Czepliewicz, a banking analyst at Collins Stewart in London. “The backdrop has worsened, therefore banks in the interim have decided to lower their sovereign holdings and some have raised equity, so they’ve reacted and yet the aggregate number hasn’t changed much.”…
Other lenders needing to bolster their reserves include Deutsche Bank AG, with a shortfall of 3.2 billion euros, Banco Bilbao Vizcaya Argentaria SA (BBVA), which missed the target by 6.33 billion euros, BNP Paribas (BNP) SA, with a shortfall of 1.5 billion euros, and Societe Generale SA (GLE), which needs 2.1 billion euros. Commerzbank AG (CBK) needs 5.3 billion euros to meet the target, German regulator Bafin said. France’s Groupe BPCE, the owner of Natixis SA, had a 3.7 billion euro shortfall, and Italy’s Banca Monte dei Paschi di Siena SpA (BMPS) needs to raise 3.27 billion euros.
29 comments
Comments are closed.
How do banks “raise capital”? A bake sale? They don’t produce anything!
One way is to issue and sell more common stock. But that dilutes existing shares so banks are very reluctant to do it, I would bet.
If banking was done ethically, the bank’s common stock itself would be the money the bank lent or spent into existence.
OK I sorta get it. Just out of curiosity, how much shareholder value is there to dilute? What is the market cap of all these banks together? It would be interesting to get an idea of how much shareholder equity banks in Europe have to use as a buffer.
Also if the banks sell sovereign bonds in order to deleverage, wouldn’t that make the interest rates on this kind of debt go higher and cause more problems to countries on the verge?
Just out of curiosity, how much shareholder value is there to dilute? What is the market cap of all these banks together? BenE
I don’t keep up with such things. Yves would know, I’d bet.
It would be interesting to get an idea of how much shareholder equity banks in Europe have to use as a buffer. BenE
I recall hearing around 3% (2%?) of assets.
Also if the banks sell sovereign bonds in order to deleverage, wouldn’t that make the interest rates on this kind of debt go higher and cause more problems to countries on the verge? BenE
LOL! Sounds correct. Selling could be suicidal for the banks unless they are first out the door. They would increase their own default risk.
Another way to raise capital that US banks use is to make a profit and not pay it out in dividends or buy backs. The profit then goes to capital account as the net worth of the bank increases.
How do they ‘make profits’ when there are capital outflows (bank runs), accelerating loan defaults/redemptions (a collapsing loan portfolio), and a central bank not willing to buy it’s own issuance (monetize) ?
Perhaps they can find more suckers buyers in Asia.
suckersThis is just an impressionistic comment, but it seems that the ‘too big to fail’ mentality still underlies nearly all the strategic thinking (if it can be dignified with that term) of the European banking regulators.
After all, if it’s merely a matter of protecting insured depositors, events such as WAMU being folded into JP Morgan Chase in 2008 showed that this is fairly straightforward exercise.
Apparently, it’s the daisy-chained, off-exchange derivative exposures of these banks which induces the regulators’ one-way obsession with endlessly bolstering them via capital injections and concessionary lending from the ECB, rather than simply ordering them to wind down their businesses and transfer their deposits to sounder banks.
Like WAMU, many of these undercapitalized, retarded dinosaurs simply should not exist tomorrow morning. Depositors should find a new sign on the branch office when they go there.
Coddling corporate losers simply because they’ve created a dangerous, hellish spider web of interlocking exposures is bad public policy. After a couple of decades of this madness, the results are now becoming apparent. Enough years of massive capital misallocation, and pretty soon the middle class is hungry, jobless, poor and angry.
Bankers’ exorbitant privilege of state protection and collusive industry cartels masquerading as state-sponsored central banks has got to go. I will personally volunteer to hurl Greenspan and Trichet into the smoking caldera of Popocatepetl to propitiate the angry gods. Everything better!
Yves, you are such a clear thinker/writer. Thank you.
You say they’ll “need a lot more dough than then.”
That’s the problem. The rentier class of Olde Europe is not at all used to ponying up for the good of the whole, if it means they stand to lose something themselves. They still have the *colonial mindset* of the .01%. That means they must *always* profit and post gains, never losses.
Do you think the .01% of Olde Europe will come into C.21, even kicking and screaming? The idea of change for them is, “like, so traumatic.” Can they stand it? Can they swing with the Yanks when it comes to taking a hit?
Maybe this is the real *Clash of Civilizations*.
Yves, are you going to ban this guy or what?
Why????
I think that was a joke.
Jesse, he has already cut back significantly from the 36 or so comments he was making per article a few weeks ago. Let us definitely count our blessings for that! Perhaps Yves finds his more limited ramblings to have entertainment value. Some have certainly been amusingly undecipherable.
True, better to let him spin himself out. If she bans him, it means the terrorists have won!
The Ministry of Truth already has him designated for re-education. Thank you for your compliance, citizen.
I take it you’re unfamiliar with his posts? Check out this one from two posts down.
YVES, off the record: more Comments to Kasting piece discuss blog by Jim Willie of “Silver Doctors” online, dated 8 Dec 2011 at 9:45 AM. So, “old news?”
“Jim Willie: JP Morgan Crashed MF Global to Avert COMEX Failure, European Derivatives Implosion.” (JPM: The City)
LINK:
http://silverdoctors.blogspot.com/2011/12/jim-willie-jp-morgan-crashed-mf-global.html
Jim Willie said to live in South America. Glenn Greenwald has been posting from South America (permanent post?)
Is this the *Inflection Point* for the centuries-old graph of the “Anglo-American Establishment,” I wonder?
Stay safe.
The originators of the maxim, “never dip into the capital”? Perhaps a genetic malady of wealth. It may be time to instituting nature conservancies for profits from those who no longer want the burdens of taxation or running red ink on the balance sheet. These cash conservancies will allow for the perpetual accumulation, at an increasing rate of money, without any harm coming to the pile from politicians, non profits, charities or other parasitical NGOs. Only if we act now can we save the profits, or you just read on.
24 hours to save our democracy
http://www.avaaz.org/en/democracy_trumps_austerity/?cl=1444783833&v=11513
Was not quite sure what country they were talking about but that the problem is that “democracy” they are referring to has no money to spend.
These countries have been living off of debt for so long that when the debt teet is cutoff they are going to go into shock.
Rubbish…. The ECB will easily find $115Bn to bail out the banks. But cannot find any money to improve social conditions for the citizens.
You also confuse currency user countries with countries that issue their own currency.
You also confuse currency user countries with countries that issue their own currency. Andrew
Correct.
TARP Euro is coming. It will be individual countries nationalizing banks.
Dexia was first.
Next the Germans and Commerzbank.
http://www.spiegel.de/international/business/0,1518,801827,00.html
The French Credit Agricole and Soc Gen are right behind. And the Spaniards are waiting to go directly to the IMF because they have no money to nationalize.
The 115 billion number is low by a factor of 10 if forced to mark to market and set aside proper allowances for loan losses for sovereign debt, real estate and the impact of austerity.
YVES, off the record: more Comments to Kasting piece discuss blog by Jim Willie of “Silver Doctors” online, dated 8 Dec 2011 at 9:45 AM. So, “old news?”
“Jim Willie: JP Morgan Crashed MF Global to Avert COMEX Failure, European Derivatives Implosion.” (JPM: The City)
LINK:
http://silverdoctors.blogspot.com/2011/12/jim-willie-jp-morgan-crashed-mf-global.html
Jim Willie said to live in South America. Glenn Greenwald has been posting from South America (permanent post?)
Is this the *Inflection Point* for the centuries-old graph of the “Anglo-American Establishment,” I wonder?
Stay safe.
I think someone forgot to mention Intesa sanpaolo (I suppose not mentioning UBS makes sense, since it isn’t part of the Eurozone, but it still bears watching, imo)
And the Aussie big four are also worth watching. Nobody’s looking at that part of the world just now, but that property bubble’s gotta burst soon (and it’s at insane levels presently). I’m willing to bet that all of them require enormous amounts of government assistance to stay afloat over the next two years, no matter what happens in China (then again, wtf do I know–I play with a different sort of imaginary numbers by trade…)
One million monkeys at one million printing presses would be hard-pressed to print up all the money required to get out of this mess (although, to be fair to them, a mere twenty or so monkeys have done an admirable job of releasing those damned Treasury and EBA stress test results)
Hate to be disagreeable, but I actually found four big surprises in the European stress tests.
http://financeaddict.com/2011/12/four-surprising-things-about-the-european-stress-tests/
Thought this was a very interesting take via ZH on what the MF Global fiasco may have finally brought under real scrutiny – check out the exposure of JPM, MS, Goldman, 2 big Canadian banks and others playing with fire courtesy of the incredible laxity of the City of London. Every one of these players deserves to have this blow up in their faces and go down with all hands considering this is 2011, not 2007:
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
The irony is that the EBA was expecting to call for new capital in the EUR 240 billion range.
So with the ECB flush with another almost 700b euros won’t they all be able to limp along on ultra low overnight rates until the recession ends? Then they can gradually build up their reserves. That would also give the ECB time to change its mandate from purely monetary to fiscal. Then they can print the rest of the money they need to get out of the red, right? And the taxpayer pays again. Some European Federal income tax? This seems like a very convoluted way to devalue the Euro.
The banks are bankrupt. The euphemism for this is insolvent. There is no way out for them other than hyperinflation with them getting first access to the printed money. Not going to happen in Europe because of Germany. Not clear in U.S. which path we will take. I just hope we keep the lights on.