European Banks
| Sun Sep. 21, 2008 10:03 AM PDT
EUROPEAN BANKS....A few days ago I asked whether any big European banks had collapsed. A couple of days later HBOS essentially did just that. Today, via Matt Yglesias, Daniel Gros and Stefano Micossi suggest that European banks are actually worse off than American banks:
The dozen largest European banks have now on average an overall leverage ratio (shareholders equity to total assets) of 35, compared to less than 20 for the largest US banks. But at the same time most large European banks also report regulatory leverage ratios of close to 10. Part of the difference is explained by the fact that the massive in-house investment banking operations of European banks are not subject to any regulatory capital requirement.
....The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany....With banks that have outgrown national regulators and the financing capacities of national treasuries, European central banks and regulators are living on borrowed time. They cannot simply develop "road maps" but must contemplate a worst case scenario.
For now, I'm passing this along without comment. Just something to keep an eye on while we all contemplate the end of the world.
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Comments
That's ok, we're going to bail them out too.
http://calculatedrisk.blogspot.com/2008/09/bailout-eligibility-expanded-...
Paulson confirms on TV, via Reuters: Paulson: Foreign banks can use U.S. rescue plan
Treasury Secretary Henry Paulson said Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.
"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on ABC television's "This Week with George Stephanopolous."
As i understand it the main reason for the differences in the leverage ration between the european banks and the US banks is down to the differences between the accounting standards used. The EU uses IFRS which is stricter about which assets are to be carried on the balance sheets (and therefore show up in the leverage ratios) than the GAAP standards used by US banks.
For example Deutsche Bank in 2006 had 448 billion euros in assets on the balance sheet using GAAP but 1010 billion in assets under IFRS.
I thought the banks were failing because they invested in a lot of bad loans in the U.S. housing markets - option arms, no down, no docs. etc etc. How then do European banks fail due to U.S. bad mortgages? There aren't enough bad mortgages in the U.S. to tank foreign banks with 50 billion in assets.
Are we seeing enron accounting here, where banks package and repackage their own products, sell between their subsidiaries, then turn around and sell them externally at some quintupled price?
What does this: "Deutsche Bank amount to around 2,000 billion euro" really mean? How did we go from a "subprime crisis" in the U.S. to a 2 trillion dollar bank in Germany failing?
A few observations about this. In response to "A Different Matt," if I'm not mistaken there has also been something of a housing bubble in Europe. A friend of mine in England has referred to it -- certainly housing there has skyrocketed at an alarming rate -- so perhaps they are a bit over-extended on their own turf.
Beyond that, the banking industry these days is global. I know that the reinsurance industry (the market into which insurance companies spread their risk around) is entirely global. It therefore wouldn't surprise me if a lot of U.S. mortgage debt has likewise been securitized into European bank holdings.
And this leads to a broader observation. I am old enough to remember when banks generally could not extend across state lines. "First Interstate Bank" (now long absorbed into Wells Fargo, I believe) was named that for a reason. Banks were restricted, mostly due to old New Deal laws, and to be sure it sometimes was inconvenient. Traveler's Cheques made real sense, after all, when you couldn't find any of your own bank's branches to cash a check at. But I thought it also served some useful functions, above all as a modest effort to limit excessive concentration of wealth and power into fewer and fewer hands.
So I was opposed to the lifting of those restrictions on interstate banking. I well remember the cries of anguish from the financial community at the time: "We can't compete in the international market this way." Foreign banks, under no such restrictions, were growing enormous. They could fund huge projects all by themselves whereas there were projects in the U.S. requiring multiple bank partners in order to fund. That was the argument, anyhow. I wonder now if my initial objections weren't right on the money after all: one big bank going under now might well more than equal a significant fraction of the hundreds of banks that failed in the Great Depression. Saying "Washington Mutual might fail" may not be nearly as impressive as, in 1930, saying "300 banks failed this week." But WaMu might easily equal those 300 and 300 more besides.
And now we see it isn't just Washington Mutual. It could be any number of banks, most certainly including any number of European banks. "Too big to fail, too big to save" is a scary thought.
Northern Rock, the current sponsor of Newcastle United, was nationalized by the British government almost exactly a year ago. I think I read about it in The Economist, though I also read a scathing commentary comparing the two, and comparing Man U to Johnny Cochrine and AIG to OJ, before shifting into comparisons of John Kerry and McCain. (Both married herisses, and picked lightweight veeps with nice hair. All this from a sports handicapping blog, of all places. Its on roqqbottom.blogspot.com, on Sep 18
