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Has anyone found a good vehicle for going short Europe's *worst* capitalized banks?  Maybe there is a liquid index that represents a diversified set of European mid-cap banks?  I'm aware of EUFN but that appears to be just a select group of top tier banks, including some British ones, and some of these may have already recapitalized.

 

The basic thesis here is that European banking authority is going to later this year do the first *real* stress test, and any capital shortfalls from that exercise will significantly impair the equity of affected banks.  The worst case would be that Europe lies (once again) and tells us their banks are just fine and don't need more money.

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Has anyone found a good vehicle for going short Europe's *worst* capitalized banks?  Maybe there is a liquid index that represents a diversified set of European mid-cap banks?  I'm aware of EUFN but that appears to be just a select group of top tier banks, including some British ones, and some of these may have already recapitalized.

 

The basic thesis here is that European banking authority is going to later this year do the first *real* stress test, and any capital shortfalls from that exercise will significantly impair the equity of affected banks.  The worst case would be that Europe lies (once again) and tells us their banks are just fine and don't need more money.

 

I followed the 2011 euro crisis closely. Here is my 2 cents: Why would the regulators say anything different this year vs 2011? Many European countries rely on their banks to buy their government debts in order to finance at a reasonable rate. By telling the capital market that these same banks are under capitalized, which they are, those countries would be shooting themselves on their own feet and cause them to pay higher rates for any new debts. Similar to Japan, there is not enough political will to enact substantial fundamental changes to the economy and social policy. The financial game that they play will buy them time and years of painfully slow growth. Government and banks are both complicit in their attempts to maintain the status quo.

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Not a specific stock recommendation...does not belong in the "Investment Ideas" section!  Cheers!

 

The specific investment idea is:

 

Buy the October 2014 $27 Put on symbol EUFN.

 

And the corresponding question is:  can someone come up with a better vehicle for the trade than EUFN?

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Has anyone found a good vehicle for going short Europe's *worst* capitalized banks?  Maybe there is a liquid index that represents a diversified set of European mid-cap banks?  I'm aware of EUFN but that appears to be just a select group of top tier banks, including some British ones, and some of these may have already recapitalized.

 

The basic thesis here is that European banking authority is going to later this year do the first *real* stress test, and any capital shortfalls from that exercise will significantly impair the equity of affected banks.  The worst case would be that Europe lies (once again) and tells us their banks are just fine and don't need more money.

 

I followed the 2011 euro crisis closely. Here is my 2 cents: Why would the regulators say anything different this year vs 2011? Many European countries rely on their banks to buy their government debts in order to finance at a reasonable rate. By telling the capital market that these same banks are under capitalized, which they are, those countries would be shooting themselves on their own feet and cause them to pay higher rates for any new debts. Similar to Japan, there is not enough political will to enact substantial fundamental changes to the economy and social policy. The financial game that they play will buy them time and years of painfully slow growth. Government and banks are both complicit in their attempts to maintain the status quo.

 

This is the key question.  But what is different now than then is government rates normalized because the ECB said they would backstop them and "do whatever it takes".      So now, unlike then, there is a window of opportunity where the market will keep country rates low, but they can start to force some of the banks to recap.    And my reading of this is that the bondholders won't take any hits and the countries that theoretically backstop their own banks won't be asked to backstop.  It will all get dumped on equity.

 

The related question is how many banks will be asked to recap, and how fast?  It's Europe, so I guess a snail's pace won't surprise me.

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The 2011 crisis was eased in part because implementation of Basel III was pushed back. Those capital ratio deadlines are quickly approaching again. This time market values are higher, so forcing banks to raise equity will not be quite as painful.

 

http://en.wikipedia.org/wiki/Basel_III#Capital_requirements_2

 

Exactly right.    The trick is I want a vehicle for trading the idea that is low cost.    I could stomach a 2% fee per year to just short a pool of European mid-cap banks at this point.    Unfortunately EUFN carries a 10% short fee, and I think the banks it comprises are some of the largest that will probably escape touch recap requirements?

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There are very few US listed European banks trading above book value - AIBYY, IRE, LYG, SAN, BBVA. You might see if they are more attractive to short than EUFN.

 

I wouldn't object to trading against the foreign symbol in a foreign market.  Probably the US listed banks will be some of the better quality ones.  Some of those US listed entities have fairly high dividends.

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  • 2 years later...
  • 2 weeks later...

http://www.ft.com/cms/s/0/5dd775bc-39cc-11e6-9a05-82a9b15a8ee7.html

 

UK lenders Barclays and Lloyds Banking Group were among the hardest hit, falling as much as 25 per cent before rebounding slightly to trade down about 20 per cent at lunch time. In Germany Deutsche Bank shares were down 13 per cent, while France’s BNP Paribas fell 17 per cent.

 

In Spain shares in Banco Santander and Banco Sabadell fell almost 20 per cent in morning trading thanks in part to both banks having large retail operations in the UK. Meanwhile, in Italy shares in the country’s biggest lenders, Intesa Sanpaolo and UniCredit, were down 19 per cent and 17 per cent respectively.

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  • 2 weeks later...

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